ECONOMY OF MONGOLIA IN THE POST-SOVIET ERA

ECONOMY OF MONGOLIA IN THE POST-SOVIET ERA

In the early 1990s, Mongolia was one of the poorest countries in the world. The per capita income plummeted to $473 in 1989, when it was still under Soviet domination, to about $100 in 1992, when it broke free of Soviet control. Overflight fees from foreign airlines was the single largest sources of national income in 1990s. Foreign aid helped Mongolia but also helped it rack up a foreign debt roughly equal to its GDP.

Soviet assistance, at its height one-third of GDP, disappeared almost overnight in 1990 and 1991 at the time of the dismantlement of the USSR. The following decade saw Mongolia endure both deep recession because of political inaction and natural disasters, as well as strong economic growth because of market reforms and extensive privatization of the formerly state-run economy. The country opened a fledgling stock exchange in 1991. [Source: CIA World Factbook =]

Since the late 1990s, the Mongolian economy has made steady — and fairly recently, dramatic — progress. GNP was about $1 billion in the mid 2000s and reached $11.73 billion in 2014. GDP per capita increased from $1,865 in 2002 to $3,910 in 2014. Despite a wealth of recently discovered mineral resources, many residents remain desperately poor. Unemployment and high inflation have also fueled anger and resentment.

Economic Reforms in Mongolia in the Late 1980s

In the late 1980s, dissatisfaction with the economic stagnation of the last years of the former regime of Yumjaagiyn Tsedenbal and the influence of the Soviet perestroika led Mongolia to launch its own program of economic reforms. This program had five goals: acceleration of development; application of science and technology to production; reform of management and planning; greater independence of enterprises; and a balance of individual, collective, and societal interests. Acceleration of development in general was to result from the attainment of the other four goals. Scientific research was being redirected to better serve economic development, with electronics, automation, biotechnology, and the creation of materials becoming the priority areas of research and cooperation with Comecon countries. [Source: Library of Congress, June 1989 *]

Reform of management and planning began in 1986 with the first of several rounds of reorganization of governmental bodies dealing with the economy. These changes rationalized and streamlined state economic organizations; reduced the number of administrative positions by 3,000; and saved 20 million tugriks between 1986 and 1988. The role of the central planning bodies was to be reduced by limiting the duties of the State Planning and Economic Committee to overseeing general capital-investment policy. The indicators specified in the five-year and the annual national economic plans also were to be decreased. State committees and ministries, rather than the State Planning and Economic Committee, were to decide upon machinery and equipment purchases. Decentralization of economic management also was to extend to aymag and city administrations and enterprises. These bodies were given greater autonomy in construction and production, and they also were held financially responsible for profits and losses.*

Efforts to devolve economic decision making to the enterprise level began in 1986, when more than 100 enterprises began experimenting with financial autonomy (before then, enterprises operating with a deficit had been subsidized by the state). Enterprises were accountable for their own losses, and they were responsible for fulfilling sales contracts and export orders. The draft law on state enterprises, presented to the People's Great Hural in December 1988, was to extend greater independence in economic matters to all state enterprises and to lead to an economy that combined planning and market mechanisms.*

Under provisions of the draft law, state enterprises were to be authorized to make their own annual and five-year plans and to negotiate with state and local authorities to pay taxes based on long-term quotas. State enterprises also were to sell output exceeding state orders and unused assets; to establish their own, or to cooperate with existing, scientific organizations to solve scientific and technical problems; to be financially responsible for losses, and to pay back bank loans; to set prices independently; to establish wage rates based on enterprise profitability; to purchase materials and goods from individuals, collectives, state distribution organizations, and wholesale trade enterprises; to establish direct ties with foreign economic organizations; to manage their own foreign currency; and to conduct foreign trade.*

The draft law stipulated that enterprises were to be divided into two categories. National enterprises were to be the responsibility of ministries, state committees, and departments; local enterprises were to be supervised by executive committees of aymag and city administrations or members of local hurals. State and local bodies were not to interfere in the day-to-day decision making of enterprises, but they were responsible for ensuring that enterprises obeyed the law and that they did not suppress the interests of society. Enterprises were allowed to form three kinds of associations: production associations, scientific production associations, and enterprise associations to coordinate economic affairs. Finally, the draft law said that the state was the owner of state enterprises and that the labor collective was the lawful manager of a state enterprise. The labor collective was to elect a labor collective council, which was to ensure that the enterprise director (who acted on behalf of the collective and the state) met the interests of the collective in managing the enterprise. It was unclear how the relationship between the enterprise director and the labor collective would work out in practice.*

Balancing the interests of society, the collective, and the individual entailed providing scope for individual and collective initiative to increase production and efficiency. Enlarging the scope for individual initiative had three aspects: linking wages to enterprise profitability, permitting output exceeding state plans to be sold for profit, and providing employment opportunities outside the state and the cooperative sectors. In 1988 wage scales dependent on enterprise revenues were introduced to the light and food industries and to the domestic trade sector, resulting in a reduction in materials utilized by those sectors. Beginning in late 1986, state farms and negdels (agricultural stations) were eligible for state payments for output exceeding the annual average growth rate for the previous five-year plan. Individual agricultural cooperative members and workers were allowed increasing numbers of privately held livestock. The draft law also stipulated that enterprises could sell production exceeding plan targets for their own profit. In 1987 the government began encouraging the formation of voluntary labor associations, auxiliary farms, and sideline production attached to enterprises, schools, and so forth to increase production of foodstuffs and consumer goods, to engage in primary processing of agricultural goods, and to provide services. The authorities permitted the formation of individual and family-based cooperatives; by 1988 there were 480 such cooperatives. Contracting among state farms and both agricultural cooperatives and families was permitted and was increasing in the late 1980s (see Agriculture; and Industry).

Economic Conditions in Mongolia in the 1980s

In late 1989 the new openness about economic conditions brought forth a deputy minister of foreign economic relations and supply's admission that many official statistics had been falsified during the Tsedenbal years to bolster claims of economic progress. Mongolia watcher Alan Sanders, when reporting on the revelation, said "The deluge of phoney statistics has had some effect--not least on Mongolian economists, who have been using them for planning purposes." The statistics had found their way into United Nations publications and been used for years by foreign analysts projecting the state of the Mongolian economy. Users of the economic data in this book thus are warned to keep in mind the "official" nature of many of the figures used. After the admission, both the leadership and the media criticized the provision of inaccurate economic statistics to United Nations agencies as well as Mongolia's refusal to seek economic assistance from Western countries. [Source: Robert L. Worden, Library of Congress, June 1989 *]

In late 1989, the government revealed the existence in Dornod Aymag of the Mardai uranium mine and the nearby town of Erdes, which were built and run as concessions by the Soviet Union. Established by a 1981 intergovernmental agreement, the mine began shipments of uranium ore to the Soviet Union in 1988. It was also disclosed that unemployment officially was 27,000, but unofficial estimates ran as high as three time that figure. Furthermore, Mongolia was more forthright about the economic drawbacks stemming from the country's political and ideological orientation. *

Economic Collapse in Mongolia After the Soviet Era

As Mongolia became a democracy and transitioned away from Soviet domination in the late 1980s in the early 1990s. Mongolia had been too dependent on assistance from the Soviet Union and failed to adequately develop its own economy. When the Soviets Union left Mongolia was saddled with $3.5 billion in debt. Huge shortages ensued when Soviet subsidies were taken away in 1992.

In the early 1990s the economy contracted by 15 percent, inflation reached 300 percent and living standards plummeted and unemployment to reach over 50 percent. Only emergency food from aid agencies kept a famine from occurring.

Lack of fuel, machinery and, spare parts brought power plants, factories, trucks and machinery to a grinding halt. Lack of medical supplies severely limited health care. Shortages of these things in turn causes people to loose their jobs, store shelves to be empty and pension payments to dry up. People returned to herding as way to get something to eat and camels and yaks were used to transport goods.

Soviet assistance, at its height one-third of GDP, disappeared almost overnight in 1990 and 1991 at the time of the dismantlement of the USSR. The following decade saw Mongolia endure both deep recession because of political inaction and natural disasters, as well as strong economic growth because of market reforms and extensive privatization of the formerly state-run economy. The country opened a fledgling stock exchange in 1991. [Source: CIA World Factbook =]

Economic Reforms in Mongolia After the Soviet Era

Under the advise of the World Bank and other international organization, state industries were dismantled, trade barriers were lowered, and livestock was distributed to nomads. People were given the right to own property and land. Development funds were funneled into roads and power plants rather than high-tech manufacturing.

Laws were passed to make it easier for foreign investors to invest. Some foreign investment was funneled into tourism. State-owned hotels were privatized and numerous new hotels, nightclubs, bars, restaurants and small stores sprung up. Mongolia’s first stab at privatization involved giving away vouchers with Genghis Khan’s picture on them. They were given away because no one had money to buy them. The scheme was poorly thought out and executed and many of the enterprises simply collapsed.

The economic reforms in Mongolia brought social and economic hardship and were politically unpopular. The reforms and the painful transition to the market system initially resulted in declining production, severe shortages, inflation, record drops in real income and unemployment rates over 50 percent. International aid was necessary to keep the economy afloat. Foreign aid accounted for 20 percent of the economy in some years in the 1990s. See Development.

Mongolia stuck with a painful International Monetary Fund that cut inflation and increased efficiency When price controls were eliminated, the cost of living soared. Imports fell off, manufactured goods were scarce and basic foodstuffs like sugar, flour, rice, butter and meat were temporarily rationed. The economy was also hurt by falling prices of cashmere and copper.

Nomads in the Post Soviet Era

The collectives were privatized in 1996. Many people were given livestock and the rights to use some grazing land. Herders could buy and sell their animals. Some people took up herding who had never herded before.

Some collectives became shareholding companies. Herders used government vouchers to buy animals that belonged to cooperatives and state farms. Many families took ownership of more than a hundred animals. Some nomads set up systems called horshoo, in which individual families took care of their own animals but joined together to transport them to market. By this time much of the herding was done on motorcycle rather than on horseback.

In the early 1990s many herders didn’t want to sell their meat products because the prices were too low. This resulted in food shortages in the cities. One nomad told National Geographic. "Unless the price is right, we don't want to sell animals. So meat and milk in the cities are getting scarcer and more expensive."

Some herders did very well financially. In the early 1990s a family with 600 animals was considered rich. By the mid 1990s, many families had 400 animals and families with 1,300 animals were not uncommon. The cashmere trade was particularly lucrative.

Improvements in the Mongoliaan Economy

After the initial shock of economic changes in the 1990s. things began to settle down. Inflation was reduced, modest growth was reported., foreign investment steadily increased. There was lots of construction in Ulaanbaatar. Foreign companies put a lot of money into projects and foreign aid agencies funded infrastructure projects like roads and railroads needed to make the projects work.

Mongolia joined the World Trade Organization in 1997 and has sought to expand its participation in regional economic and trade regimes. [Source: CIA World Factbook =]

In the early 2000s there was discussion of privatizing 1) MIAT, the national airline; 2) Mongol Daatgal, the largest insurance company; 3) Gobi JSC, the largest cashmere producer; 4) NIC, the largest petroleum importer; 5) Savings Bank, the last government bank; 6) the nation’s largest copper mine; and other industries.

In the early 2000s, 70 percent of the Mongolia’s economic output was from private business and unemployment was listed at 30 percent. Growth was 1.1 percent in 2000; 3.9 percent in 2002; and 5.5 percent in 2003. Inflation in 2003 was 4.7 percent, down from 8.1 percent in 2000.

After the collapse of the Soviet Union, Ulaan Baatar became both poorer and more prosperous. There are now some nice hotels and a surprising number of nice European- and Japanese-made vehicles on the streets. The population increased from 500,000 to 800,000 between 1997 and 2001 and is well over a million today. According to some statistics more than half the people in the city are unemployed. The poverty is so bad children sleep underground to stay warm in the winter.

Harvard-educated Tsakhia Elbegdorj served at prime minister of Mongolia in the late 1990s and the mid 2000s. He was a major advocate of market reforms and was one of the main forces behind privatizing the nation’s livestock herds and achieving a cancellation of 98 percent of Mongolia’s Soviet-era debt. He also headed the Liberty Center, a foundation that promoted political and legal reform and translated into Mongolian the works by conservative economist Milton Friedman. Elbegdorj passed more market reforms and built a high technology economy in Mongolia.

Growth averaged nearly 9 percent per year in 2004-08 largely because of trade with China, growth in the mining industry, high copper prices globally and new gold production. The MPRP under Bagabandi promised to raise pensions and ages and reorganize the herding economy.

Mongolia Struggles with Democracy and Change

Throughout the 1990s and 2000s, Ulaanbaatar was the site of repeated protests over poverty, corruption and complaints about land reform. Mongolia is still one of the poorest countries in Asia. Most Mongolians get by on the equivalent of a few hundred dollars a year. Many are traditional sheep and cattle herders on the vast Mongolian steppe. In the past this vast nation was often slow to change. But in the last few decades there has been massive upheaval. Some have fared well, but many, like the nomads and the poor are struggling to catch up. Turning this ancient country into a modern one is a huge task and, despite nearly two decades of reform, Mongolia still has a long way to go.

In 2007, Daniel Griffiths of the BBC News wrote: “Democracy has not brought the better life that many people hoped for. There is growing anger over the gap between rich and poor The communists did not disappear - the old revolutionary leader Sukhbataar still presides over the main square - and many of them are now in the current government building a new future for the country. Only now the talk is of money not Marx. Mongolia's economy grew by around 6 percent in 2006 and some people are doing very well. [Source: Daniel Griffiths, BBC News, January 11, 2007 ***]

“At a building site in the centre of town I meet Tsendee. He started his construction company with just 10 employees. Now he has got 400 workers on the payroll. "Since Mongolia became a democracy and a market economy, many businesses like mine have done very well," he tells me. "For me this has meant a huge change. I can afford to do anything... life is great." ***

“But despite these changes, between one third and one half of the country lives in poverty, according to government statistics. Many of them end up in the vast shanty towns on the outskirts of Ulaanbaatar, surviving on just a few dollars a day. One of those is Byambasuren whose husband was an alcoholic who used to beat her. In the end she threw him out and now she is bringing up her three children on her own in a tiny hut with no glass, just plastic sheeting, in the window frames. "Our life was good during communism but capitalism has left us with nothing," she tells me. "The government has done nothing to help us and nobody cares." ***

“High on the grasslands of Mongolia it does not seem as though much has changed in hundreds of years. The vast steppe still rolls on forever until blue sky and yellow earth become one. The nomads, astride their small fast ponies, still herd their animals from summer to winter pastures, following in the footsteps of their ancestors.” ***

The population has become increasingly urbanized, with 60 percent of the population living in towns (40 percent in the capital alone).“Once half of Mongolia's 2.8 million population lived this way, but now things are changing rapidly. Sharhuu has spent his entire life on the grasslands. Now in his sixties, his face weathered from years spent on the steppe, he is thinking the unthinkable - giving up the old ways forever. "My family can help me for now," he says, but, "I know that can't live this way for much longer." ***

“And he is not alone. A series of long tough winters have hit the nomads hard, destroying livestock and leaving many here with nothing. There is little good grazing land for the animals that are left. And since the end of communism in the early 1990s, and Mongolia's move to a market economy, there has not been much help from the government. Like many nomads, Sharhuu has little option but to move to the cities...The government say it is doing more to help fight poverty. But many claim it is not enough and in Ulaanbaatar anger is growing about the gap between rich and poor. Protests in the main square are now a daily occurrence.” ***

20, 000 Protest Food Prices in Mongolia in 2008

In April 2008, 20,000 people marched through the streets of Ulaanbaatar, demanding the government stabilize prices of rice, meat and flour, and guarantee the incomes of poor people. The protest was called by the Mongolian Confederation of Trade Unions. Banners said “Stop inflated food prices” and “Let the Salaries of the working class increase”. [Source: New York Times, April 22, 2008 *|*]

According to the New York Times: “When you take into consideration there are only just under 3 million people in the whole of this huge country, 20,000 people that’s a substantial movement!A rally was addressed by S Ganbaatar, president of the Mongolian Confederation of Trade Unions: “We demand that the government of Mongolia take concrete action to stop the rising consumer prices which enrich a few companies and make lives of thousands of Mongolians unbearable.” He said the price of a 25-kilogram, or 55-pound, bag of flour rose to $21.40 from $7.70 four months ago. A consequence of this is that the price of a loaf of bread went up 50 percent at the start of last week. *|*

Mr Ganbaatar said the confederation would organize a nationwide strike if the government did not act to lower prices. During the Soviet period Mongolia was virtually self sufficient in wheat grain. However, since the 1990s privatisation of collectivised agriculture and turning the food regime on to the market has meant that more of the population’s daily food needs have been met by what were cheaper foreign imports. Now, with a global crisis in food prices, ordinary Mongolians are feeling the strain.”

Mongolia and the Global Financial Crisis of 2008-2009

By late 2008, Mongolia was hit hard by the global financial crisis. Slower global economic growth hurt the country's exports, notably copper, and slashed government revenues. As a result, Mongolia's real economy contracted 1.3 percent in 2009. When the price of copper crashed in late 2008, Mongolia's government had to call in the International Monetary Fund for help.

In early 2009, the International Monetary Fund reached a $236 million Stand-by Arrangement with Mongolia and the country emerged from the crisis with a stronger banking sector and needed reforms to the government’s fiscal management. [Source: CIA World Factbook =]

Before the crisis Mongolia saw it per capita GDP rise to US$3,300, doubling in the previous five years. Foreign mining giants were exploiting are preparing to exploit vast deposits of everything from gold to coal. The economy is expected was expected to grow at a healthy 8 percent in 2008 and the country’s currency advanced 10 percent against the US dollar in 2007, making imports cheaper. But unemployment and inflation remianed high. [Source: Tania Branigan, The Guardian, July 2, 2008]

Mongolian Economy in the 2010s

Mongolia had the world's fastest-growing economy in 2011, when growth was tabulated to be 17.8 percent, nearly twice that of China. The economy grew more than 10 percent each year between 2010 and 2013, largely on the strength of commodity exports to nearby countries and high government spending domestically, before slowing to 7.8 percent in 2014.Mongolia's economy faces near-term economic risks from the government's loose fiscal and monetary policies, which are contributing to high inflation, and from uncertainties in foreign demand for Mongolian exports. Trade with China represents nearly 62 percent of Mongolia's total external trade - China receives some 90 percent of Mongolia's exports and supplies Mongolia with more than one-third of its imports. Mongolia has relied on Russia for energy supplies, leaving it vulnerable to price increases; in 2014, Mongolia purchased nearly 90 percent of its gasoline and diesel fuel from Russia. A drop in FDI has put pressure on Mongolia's external finances. Remittances from Mongolians working abroad, particularly in South Korea, are significant. [Source: CIA World Factbook]

Bill Donahue wrote in the Washington Post, “Mongolia was for centuries made up largely of nomadic herders. Its economy was almost static; in 2011, it achieved a 17.3 percent growth in gross national product. The World Bank has predicted that Mongolia will have one of the planet’s fastest-growing economy over 2013, 2014 and 2015. The nation’s largest mine, Oyu Tolgoi, which just began production in June 2013, is believed to contain 81 billion pounds of copper and 46 million ounces of gold. Nearly all of it will go to China, and on some Chinese maps now, Mongolia is simply rendered as an Alaska-size Chinese province. The economy grew 12 percent in 2012 and 17 percent in 2011, as mining investment poured in and mineral exports to China surged. But growth could slow...the Mongolian Investment Banking Group said... if the Oyu Tolgoi project is not launched on schedule. [Source: Bill Donahue, Washington Post, September 20, 2013 |::|]

AFP reported: “The government faces mounting pressure to balance the demands of powerful multinationals and its own people.It is also dealing with uncertainty prompted by drops in commodity prices and falling demand in the key market of neighboring China. Growth has slowed in the first half of the year and foreign investment has plummeted by 43 percent — prompting parliament to hold special sessions in recent weeks. [Source: AFP, October 3, 2013]

Developing Mongolia’s Mining Wealth

In October 2009, Mongolia passed long-awaited legislation on an investment agreement to develop the Oyu Tolgoi (OT) mine, considered to be among the world's largest untapped copper-gold deposits. However, Mongolia's ongoing dispute with foreign investors developing Oyu Tolgoi has called into question the attractiveness of Mongolia as a destination for foreign investment. This caused a loss of investor confidence, a severe drop in FDI, and a slowing economy, leading to the dismissal of Prime Minister Altankhuyag in November. [Source: CIA World Factbook =]

The new government has made restoring investor trust and reviving the economy its top priority, but it will be challenged to unwind the monetary and fiscal stimulus programs in use since 2013 to counteract the fall in foreign investment. In December 2014 the government awarded a deal to develop the massive Tavan Tolgoi (TT) coal field to a consortium comprising Energy Resources/MCS (Mongolia), Shenhua (China), and Sumitomo (Japan); talks continue to hammer out the financing and the operating details. =

Mongolia’s Mining Wealth and its Expanding Income Gap

Mongolia's economy exploded in the 2010s as foreign investors and mining giant Rio Tinto began exploiting the country’s huge and largely untapped reserves of coal, copper and gold. At the same time corruption has also rose, soared. The Mongolia economy grew by 17.3 percent in 2011 thanks to a booming mining sector, but on Transparency International’s corruption perception index the country regressed from 116th place to 120th in 2011. Sumati Luvsandendev, the director of a polling organization in Ulaanbaatar, told the Guardian: "Our society worries that things are not going that well in terms of social justice, that there is a growing gap between rich and poor, and that there is an oligarchic class."

AFP reported: “Although foreign investment has quadrupled to nearly $5 billion, the least well-off among Mongolia's 2.8 million people often complain that they are reaping few benefits of the boom. "I don't think any of the ruling political parties have shown the ability to handle the the big miners," said Amitan Ulam-Undrakh, a herdsman from the south of the country. "I want to choose a party who has a clear idea on the coexistence of mining and the wider economy. Not a party that will just focus on the mining industry." [Source: AFP, June 29, 2012 ^^^]

“The enormous sums pouring into Mongolia have also led to accusations of large-scale graft levelled against political figures including former president Nambar Enkhbayar, who was charged with corruption in 2012. But the ruling Mongolian People's Party (MPP) and the main opposition Democratic Party, which have shared power in recent years, both insist they can ensure a fairer distribution of wealth across the vast nation. ^^^

Li Narangoa of Australian National University wrote: “While the mining boom is bringing great wealth to the country, it is also creating social inequalities. The wealth is not distributed evenly across the country, but remaining with the small number of people who hold power. The sudden shift from a closed and planned socialist economy to a free market economy occurred without a transparent system of government, and the potential wealth from resources has accelerated corruption in the country. Thus, those with money have become powerful and those with power have accumulated more wealth. The poor have become even poorer because there was no adequate welfare system to look after them after the collapse of the communist system. The presence of foreign mining companies creates another layer of inequality, because local employees are paid less than their foreign (Western) peers for the same job. Mongolian people also consider it unfair that foreign companies own so much of the strategically important copper and gold mine, Oyu Tolgoi, and feel threatened by the possibility that Mongolia might lose its resources to foreign companies, especially to China. [Source: Li Narangoa, eastasiaforum.org, July 10, 2012 <=>]

“The new government will face many social and economic challenges, including distributing wealth equitably across the nation, and using the revenue gained from the mining sector to build a sustainable welfare system, infrastructure and education. Developing the mining industry while promoting the Mongolian traditional pastoral economy and tourism will also be an important issue in years to come. Stamping out corruption and creating a transparent government are crucial to building the sustainable democracy that will maintain Mongolia’s reputation in the world amid growing resource nationalism and the growing economic and political influence of its two neighbours.” <=>

Mining Deals and Mongolian Politics

Mongolia is in dispute with Anglo-Australian mining giant Rio Tinto over how it will repatriate profits from the giant Oyu Tolgoi gold and copper mine. Controversial new mining bills have been championed by Mongolia’s major parties and leaders.

William MacNamara wrote in the New York Times, “In October 2009, Rio Tinto and Ivanhoe Mines, a Canadian exploration company, negotiated a deal with the Mongolian government about developing Oyu Tolgoi, the crown jewel of the country’s mining sector and the world’s biggest new source of copper. The copper and gold mine would cost more than $10 billion to build, and the potential investors wanted assurances. Under the so-called Oyu Tolgoi Investment Agreement, taxes and royalty payments to the government would be fixed for 30 years. At the time, it was considered “the initiation of a new stage in Mongolia’s history,” said Oliver Belfitt-Nash, an analyst at Monet Capital, a Mongolian investment bank. [Source: William MacNamara, New York Times, December 10, 2012 <|>]

“Rio Tinto spent billions of dollars to buy out Ivanhoe’s stake in the project and build the Oyu Tolgoi mine. Investors followed, encouraged by the cooperation between a multinational corporation and a coalition government. Some investors financed smaller mines. Others imported mining equipment or Hummers to sell to newly minted millionaires. Skyscrapers rose in central Ulaanbaatar.” <|>

Terrence Edwards of Reuters wrote: “Resource-rich Mongolia is in the middle of a mining boom that is set to transform its tiny economy, but political uncertainties have threatened to overshadow its efforts to attract the foreign investment needed to develop mines and build vital infrastructure.” Parliamentary elections in June 2012 “left more than a quarter of parliament in the hands of politicians who advocate local control of mines. Investors said the latest episode could worsen the political gridlock and increase uncertainty for foreign investors. Key decisions pending for major mining projects, such as the development of the massive Tavan Tolgoi coal mine, may also be delayed. [Source: Terrence Edwards, Reuters, August 3, 2012 *-*]

The Mongolian Democratic Party heads a coalition government keen to regulate foreign investments. Mongolian president Tsakhiagiin Elbegdorj is a free-market advocate, but his government has increasingly adopted a more "resource nationalist" approach, with laws to give the country a bigger stake in "strategic assets", such as mines. It also aims to rework a landmark 2009 investment pact to develop the massive Oyu Tolgoi copper and gold mine. [Source: Reuters, June 27, 2013]

Nambaryn Enkhbayar, who served as president of Mongolia from 2005 to 2009 but was jailed for corruption in 2012, called for the $13 billion Oyu Tolgoi copper and gold mine project with Ivanhoe Mines to be renegotiated to grant better terms to the government, and also wants to keep the coveted Tavan Tolgoi coal mine, potentially one of the world's biggest coal suppliers, in local hands. Rio Tinto has a majority stake in Ivanhoe and has full operational control over the Oyu Tolgoi mine, which was due to start production in 2012. *-*

Mongolia’s Stalled Mining Deal

The Economist reported: “The biggest emblem of Mongolia’s stalled development is the Oyu Tolgoi (OT) copper and gold mine in the Gobi desert. Rio Tinto, a mining giant, has invested more than $6 billion in the project but has been frustrated by repeated, highly politicised efforts by the Mongolian authorities to restructure the terms of their investment agreement with Rio’s subsidiary. Twice in recent weeks the government has delayed the mine’s inaugural shipment of copper. Moody’s, a large ratings agency, warns that the delay “lowers investor confidence and underscores institutional weaknesses” in Mongolia. [Source: The Economist, June 29, 2013 ^*^]

“Olivier Descamps, a managing director of the European Bank for Reconstruction and Development with responsibility for Mongolia, sees hopeful signs that the country is improving transparency but says the OT mine “is the ultimate test” of Mongolia’s ability to prove itself a reliable long-term partner for foreign investors. ^*^

“Hopes run high that the DP’s victory will put an end to political squabbling over such projects. A new foreign-investment law has long been stalled. But, as he voted, Mr Elbegdorj predicted that its progress will be quicker after the election. “In the coming autumn session of parliament,” he said, “I hope you will have that law.”“ ^*^

The Financial Times reported: “Mongolia’s economic problems are increasing its dependence on China, and to a lesser extent Russia, despite attempts during the commodities boom to forge new ties by attracting investment from further afield. Neither the MPP or DP have an easy fix for Mongolia’s economy. Previous promises to increase social spending and government salaries are running up against budget limits, while the banking sector is heavily exposed to mining and related industries. [Source: Lucy Hornby, Financial Times, November 21, 2014]

“Foreign investment has plummeted thanks to falling prices for Mongolia’s main exports, copper and coal, as well as a longstanding dispute between the government and mining group Rio Tinto over the terms of investment in the $5bn underground stage of the Oyu Tolgoi mine. In November 2014, Rio Tinto replaced two of the most senior executives in its Mongolian operations. Kay Priestly and David Klinger were chief executive and chairman respectively of Turquoise Hill, the Canadian-listed subsidiary that controls two-thirds of Oyu Tolgoi. Priestly also headed coal miner SouthGobi Resources, which delayed payment of $8.1 million in interest on a convertible debenture owed to China Investment Corp, the sovereign wealth fund. CIC already owns 16.5 per cent of the company.” [Ibid]

Mining Slumps and Efforts to Revive the Mongolian Economy

In 2013, Mongolia’s export income slipped 2.6 percent amid a decline in shipments of coal, the nation’s biggest earner. Michael Kohn wrote in Bloomberg, “Earnings were $4.27 billion in 2013, compared with $4.38 billion a year earlier, the National Statistics Office said. Coal shipments declined 41 percent by value. The slump in earnings underscores the challenges facing Mongolia as economic growth cools, foreign investment declines and the nation’s mineral boom slows amid protracted disputes with key investors. China accounted for 87 percent of exports” in 2013. Coal exports fell to $1.12 billion in 2013, from $1.9 billion a year earlier. [Source: Michael Kohn, Bloomberg, January 13, 2014]

Copper concentrate shipments, the nation’s second-biggest earner, rose 13 percent to $949 million, boosted by the start of shipments from Rio Tinto Group’s Oyu Tolgoi mine. Exports of the concentrate by volume rose 13 percent to 649,800 tons.Sales to China fell to $3.7 billion last year, from $4.06 billion a year earlier, the data showed. [Ibid]

In response to the slowdown, Mongolia’s Prime Minister unveiled a stimulus bill, dubbed a “100-day action plan” to help the economy. Kohn wrote: “Prime Minister Altankhuyag Norov’s 50-point agenda promises to boost infrastructure, mining, manufacturing and the development of small and medium-sized businesses. The bill still needs the approval of parliament and is part of a renewed drive to improve the economy after two years of slowing growth. “Within these 100 days we believe we should reduce bureaucracy, increase mining, approve the re-issue of exploration licenses” and resolve a dispute over 106 canceled mining licenses, Altankhuyag said. [Source: Michael Kohn, Bloomberg, April 30, 2014 *=*]

“Mongolia is seeking to energize an economy that saw growth decline from a world-beating 17.5 percent in 2011 to 11.7 percent in 2012. A rift with Mongolia’s biggest investor, Rio Tinto Group, is among mining disputes that have chilled foreign investment, which fell 28 percent in the first two months of 2014 and 54 percent in 2013. The Mongolian tugrik fell to a record low of 1,796 to the dollar on April 29 and has lost 25 percent of its value over the past 12 months.” *=*

“Altankhuyag’s plan broadly seeks to promote foreign investment and reduce Mongolia’s reliance on imports. Infrastructure spending proposed includes building a road to connect the landlocked nation’s two neighbors, Russia and China; constructing thermal power stations; and developing two free economic zones. It also calls for improved debt management, tax incentives for foreign banks, and raising the amount of Mongolia’s currency swap agreement with China. Concession ProjectsMongolia will also offer concession projects worth $1 billion “not only in mining but also in the tourism sector,” Altankhuyag said. “It’s important to focus on local businesses as well as mining and the fact that they are trying to do multiple things simultaneously is a good thing,” said U.S. ambassador Piper Anne Wind Campbell. “I do think you have to move forward on all these as opposed to looking for one silver bullet.” *=*

“Altankhuyag, 56, faces public pressure to improve the economy after citizens, numbering many hundreds according to an eyewitness account, rallied at least twice on Ulaanbaatar’s Chinggis Khaan Square earlier this month to protest against an inflation rate that’s running at 12.4 percent. Underscoring the challenges for the economy, Standard & Poor’s yesterday lowered Mongolia’s long-term sovereign rating to B+ from BB-, or four levels below investment grade. *=*

“Mongolia is also working to reverse earlier decisions that have been blamed for the drop in foreign investment. In October, parliament approved a law that removes distinctions between foreign and domestic investors and simplified the tax regime. Earlier this month, the government said it plans to annul a 2010 law that suspended the issuance of new mining exploration licenses. Other measures that have been proposed include setting up a professional horse-racing league that would see betting legalized to compete for the Chinese gambling market and help diversify the economy.” *=*

Mongolian Economy in the Mid 2010s

Terrence Edwards wrote in Los Angeles Times: In recent years, its economy has soared as foreign mining companies have been invited to tap the nation's rich deposits of valuable minerals, helping gross domestic product to grow nearly tenfold from 2000 to 2012. Though the economy has slowed, growth continued at a robust 7.8 percent in 2014. [Source: Terrence Edwards, Los Angeles Times, May 15, 2015]

In December 2014 the government awarded a deal to develop the massive Tavan Tolgoi (TT) coal field to a consortium comprising Energy Resources/MCS (Mongolia), Shenhua (China), and Sumitomo (Japan); talks continue to hammer out the financing and the operating details. [Source: CIA World Factbook =]

The economy grew more than 10 percent per year since 2010, largely on the strength of commodity exports to nearby countries and high government spending domestically, before slowing to 7.8 percent in 2014. Mongolia's economy faces near-term economic risks from the government's loose fiscal and monetary policies, which are contributing to high inflation, and from uncertainties in foreign demand for Mongolian exports. Trade with China represents nearly 62 percent of Mongolia's total external trade - China receives some 90 percent of Mongolia's exports and supplies Mongolia with more than one-third of its imports. Mongolia has relied on Russia for energy supplies, leaving it vulnerable to price increases; in 2014, Mongolia purchased nearly 90 percent of its gasoline and diesel fuel from Russia. A drop in FDI has put pressure on Mongolia's external finances. Remittances from Mongolians working abroad, particularly in South Korea, are significant. =

Image Sources:

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, U.S. government, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Foreign Policy, Wikipedia, BBC, CNN, and various books, websites and other publications.

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© 2008 Jeffrey Hays

Last updated April 2016

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