Terrence Edwards in Ulaanbaatar -

The Trans-Mongolian Railway badly needs an overhaul if it is to operate as an effective trade route between Russia and China. That could finally happen now both of Mongolia's powerful neighbours have good reasons for doing so, which would have the added effect of opening up more of Mongolia's vast mineral wealth to foreign investors.

The Trans-Mongolian Railway is 1,800 kilometres of 1950s-era track bisecting the landlocked country between China and Russia. It is slow and can only haul a little over 20m tonnes of cargo across the country a year. The direct route across Mongolia also fails to reach the valuable mineral deposits that are peppered throughout the country.

Russia is a 50% partner with Mongolia of Ulaanbaatar Railways, which owns and maintains the rail route. But Russia has shown little interest in the joint venture in the years since it cut Mongolia loose when the Soviet Union broke apart. But now Russia’s disputes with the West have put Mongolia in an enviable position to facilitate trade between Russia and China as well as step up its own trade in goods such as meat products.

Now Russia has promised to help Mongolia upgrade the Trans-Mongolian's rail capacity to 100m tonnes a year by 2020 as part of Moscow's “pivot” towards Asia. “Developing the railway network will help Mongolia to open up rich but for now hard-to-access deposits, and make broader and more effective use of its potential as a transit country,” Russian President Vladimir Putin said during a visit to Mongolia in September.

Mongolia’s upgrade and expansion of its railway network has been a slow-going process, which has affected the development of the country as a whole. Bottlenecks in delivering coal to China for example, has limited the growth of the coal mining industry. The metals and mining consultancy CRU Group, in a report released in October, notes that shortcomings in Mongolia’s rail infrastructure were a part of wider logistical issues of “paramount importance” if the country is to ever see worthwhile returns from its still-infant mining industry.

Giving mines rail access to deliver minerals such as coal and iron ore to China would cut transport costs in half, argues the report. That counts even more these days given the tough market for coal and China's push to wean itself off the black stuff in an effort to clean up the polluted skies above cities such as Beijing.

Gateway to Russia

Interest from Moscow in Mongolia's rail has also pushed the country to prioritise Sydney-listed Aspire Mining's Northern Railways project. The project has been added to a list of projects the country is actively seeking private partners to realise, according to a statement from the junior miner on October 13.

Aspire Mining's subsidiary Northern Railways was established in 2010 to build 547km of tracks west from Erdenet in northern Mongolia to the Nuurstei and Ovoot deposits. The final stop would be the Arts Suuri border point in northwest Mongolia, which also serves as a gateway to the Tuva Republic of Russia.

Aspire hopes to negotiate a “build-operate-transfer” contract with Mongolia through Northern Railways, under which it would manage the line for at least 20 years, says David Paull, Aspire Mining's managing director. “We did it because we knew we had a large discovery,” says Paull about Ovoot, which is currently the country's second largest known coal deposit. Its coal is “a bulk commodity some distance from existing rail. Even though coal prices were high at the time, to be an efficient supplier we needed rail brought to the deposit.” Mongolia would probably own at least 51% of the rail line under the partnership, Paull adds.

Exports to Russia from Mongolia have never meant much, especially compared with resource-hungry China. But Yondon Manalaibayar, Mongolia's state secretary for rail and transport, points out that if the Northern Railways line could be extended even further north into Russia, to the city of Kyzyl, as Mongolia hopes, it would link up to Russia's wider rail network. “Russia and China are looking for 2.5-times expansion of trade,” says Manlaibayar. “We want to facilitate all this trade. We [Mongolia and Aspire] have mutual interests.”

Wrestling for dominance

China also stands to benefit from an overhaul of the Trans-Mongolian Railway. Mines linked to the Trans-Mongolian will also now have access to overseas markets such as Japan or South Korea because China has permission from Mongolia to deliver up to 30m tonnes of freight a year to eight additional sea ports.

Up until now, Mongolia has only had access to the Tianjin port, but it has never been much of a launch pad for its minerals, aside from a small trickle of copper from Mongolia's Erdenet copper mine, says Manlaibayar. “Tianjin is only a container site, but what Mongolia really needs is what's called break bulk shipping” for the overseas transport of many tonnes of minerals, he says.

However, one condition that Russia might impose on Mongolia if it is going to help finance renovations to the Trans-Mongolian Railway is the abandoning of any plans to build a Chinese-gauge railine in Mongolia.

Russia has enjoyed strategic control over the Trans-Mongolian since it helped put it into commission in the 1950s and Moscow is keen to protect that. Local Mongolian newspaper Udriin Sonin reported in September that the president of Russian Railways, Vladimir Ivanovich Yakunin, wrote directly to Mongolia's prime minister to try to discourage construction of a Chinese gauge rail. “To create a railway with narrow gauge is the wrong decision,” Yakunin wrote, adding that the Trans-Mongolian “represents Russian interests as much as Mongolia's in terms of the railway.”

Russia uses a slightly wider gauge of 1,520 mm compared with China's 1,435 mm, which is also the international standard. Those who favour the Chinese gauge argue on the grounds of the economic cost of moving the coal from one wide gauge carriage to one with the narrower gauge when the train enters China. But opponents lean on Mongolia's historical misgivings towards China and its favouritism to Russia. The physical difference may be about the size of a credit card, but its political size in Mongolia is measureless.