Terrence Edwards in Ulaanbaatar -

The government of minerals-rich Mongolia is beginning to exhibit a return of warm feelings towards foreign investors with winter's thaw.

After nearly 10 months of increasingly frosty relations with foreign investors that began with the passing of the Strategic Entities Foreign Investment Law (SEFIL), the government is making noises about drawing up an amendment to the law that relaxes restrictions on private investors.

SEFIL's passage was initially a defensive strike by government against a $926m bid from state-owned Aluminum Corporation of China Ltd. (Chalco) for a majority of coalminer SouthGobi Resources last year. Many Mongolians saw it as a step towards shackling their country to their southern neighbour, even as it was experiencing a mining boom that helped propel economic growth to 17.3% in 2011, cited by many as the highest in the world that year.

An election was fast approaching when the Chinese bid came and voters were growing increasingly discontent with foreign ownership of Mongolian assets. "For many seekers of political office, the rhetoric of resource nationalism is an attractive campaign platform, as further evidenced by recent proposals to increase the levels of taxation on mining firms, which are generally perceived as foreign dominated," wrote law firm Hogan Lovells to its clients as the SEFIL legislation was being considered by policymakers.

The law prohibits companies from purchasing more than about a third of any asset within the mining, banking and finance, or communications sectors without first receiving approval from a government regulatory committee. Majority ownership of entities valuated above $76m needs additional approval from Mongolia's parliament. The law's vaguely defined terms, 45-day waiting periods between steps of approval and the complete absence of a regulatory mechanism made the law appear as a blockade against foreign investment.

The next strike was a proposed new Minerals Law that greatly restricted how entities could manage their mining licenses and forced companies to mine past the point of profitability. The draft law came direct from the president's office, and with a presidential election on the way one could surmise last year's mistake was being repeated.

According to projections from Brian Fisher of economic consulting firm BAEconomics, if passed in its current form, the law would result in 4 percentage points less annual GDP growth on average over the next two decades, and the same for GDP per capita. "Under the proposed mineral law, all sectors of the economy would be significantly smaller than they would be under the existing mineral law," reads a slide in a presentation by Fisher given to the Business Council of Mongolia, which has 239 member organisations.

Scared off

Inevitably, foreign direct investment (FDI) began slipping away with the deteriorating investment climate. Ulaanbaatar-based investment boutique Mongolia International Capital Corporation reported that February saw the lowest inflow of FDI on record since 2010. Little enthusiasm for Mongolian investment opportunities and poor global economic conditions brought Mongolian GDP growth down to 12.3% for 2012, when many felt it could have surpassed its 2011 rate had it not been for SEFIL.

But in recent weeks the government has appeared to put the stick away. Mongolian President Tsakhia Elbegdorj announced in February plans to revise the mining legislation and delay submitting it to parliament until October - after the presidential election has taken place.

And then this week Mongolian Investment Banking Group released a note to investors reporting that Prime Minister Norov Altankhuyag was working with his government to amend SEFIL to diminish its scope to just state-owned entities. Furthermore, it has been suggested that the $76m threshold may be raised or removed completely.

But if Mongolia is going to continue riding this wave of goodwill employed by these gestures, analysts say the politicians will have to learn that FDI doesn't necessarily mean it must be shackled to the interests of a few foreign corporations and governments. It will also have to learn to stand by agreements made, no matter who holds the reins over the country. Though the incumbent Elbegdorj is strongly favoured to win June's presidential election, investors should not have to worry about whether past deals will be honoured if the head of state should change. It will also be up to the Mongolian parliament to keep the private sector in mind when that legislation eventually reaches them. It will be at their discretion what needs to change in the draft laws that the president submits to parliament.

After all, you can only throw one out into the cold so many times before they finally find a new home and hearth to warm up by.