Taking what's mine in Mongolia

By bne IntelliNews July 26, 2011

Oliver Belfitt-Nash in Ulaanbaatar -

On July 11 and 12, Mongolia's national festival of "Nadaam" consumed the nation and the capital's stadium overflowed with people who came to watch the three Mongolian national sports - wrestling, archery and horse racing. This year there was a distinctly corporate feel to festivities, with the traditional dancers and Ghengis Khan-like warriors jostling for space with the banners of sponsors - banks and businesses that have helped drive the Mongolian economy to new heights over the past few years. Business and money is never far from the minds of Mongolians these days.

The first half of 2011 will be remembered in Mongolia for the battle among foreign investors to develop the Tavan Tolgoi coal mine, a perhaps connected fuel crisis, and the increasing politicisation of mining.

In the week before Nadaam, it was announced that the US' Peabody Energy, China's Shenhua and a Russian-Mongolian consortium had been selected to develop the western part of the giant Tavan Tolgoi coal mine, which the government estimates could hold reserves of as much as 7.5bn tonnes. It is unsurprising that the country's two powerful neighbours were selected, and Peabody has been in the picture for years, but there remains confusion about whether those three constitute the final list and what happened to the other short-listed companies, who are complaining the process was unclear and unfair. The identities of the Russian-Mongolian consortium are still unclear and confusion arose after some Japanese and South Korean firms that were part of the Russian-led group said they weren't told of the outcome, while China's Shenhua teamed up with Japan's Mitsui but the Japanese firm's name was dropped without explanation.

Government officials told Reuters in July that talks were continuing with all parties and the final proposal has not yet been approved by the National Security Council nor has it been submitted to the parliament.

Uncertainty surrounding major decisions is not unusual for Mongolia. Many have been waiting for this lengthy decision-making process to end to allow the development of Tavan Tolgoi to begin. The schedule declared by the government adds some serious pressure to get these players on the ground and digging out the coal. Citizens are waiting for their share of the profits and are becoming impatient. "Mongolian citizens now own shares in Tavan Tolgoi - we are opening thousands of new brokerage accounts," says Batbold Ariyasuren, general-director of Monet Capital Investment Bank. "Many are still sceptical, but most are eagerly waiting to cash in their shares."

Fueling a crisis

Undermining confidence among the people was a recent fuel crisis. Mongolia relies 100% on imports for its petroleum and diesel, and over 90% of this comes from Russia. Despite all the natural resources being discovered, there is precious little progress in discovering a domestic supply of oil.

On May 1, Russia cut their oil exports ostensibly due to a lack of supply at home, and Mongolia suffered immediately. All businesses from farming to mining rely on this flow of diesel to fuel their operations, and a wave of fear swept the nation. Petrol stations ran dry, and at one point only those with loyalty vouchers from specific petrol companies could fill up their cars - and even then at a shockingly inflated price.

The crisis highlighted Mongolia's reliance on its powerful neighbours, and how delicately it must tread when making decisions that concern China and Russia. In an already high-pressurised political debate over the future of the mining sector, this shock was seen by some as a reminder of Russia's influence. While investors and exporters alike see China as the natural partner for business development in Mongolia, Russia remains an ever-present player. Some believe that Russia's move was a case of it flexing its muscles to remind Mongolia who really pulls the strings.

So while China, Russia and the US have all been selected to manage Tavan Tolgoi, there is little doubt that these political tensions will continue in Mongolia as long as there are assets to sell. Letting the three superpowers fight it out for much longer would've been more trouble than it's worth, argue some. "The Mongolian government needs to play its cards right," says Fiezullah Saidov, head of Investment Banking for Monet Capital. "The decisions it makes now will have heavy consequences for many years to come."

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