By David Stanway
ULAN BATOR, April 2 (Reuters) – Mongolia sits on vast
quantities of untapped mineral wealth, the exploitation of which
is likely to turn it into one of the world’s fastest growing
economies over the next decade.
But political uncertainty ahead of parliamentary elections
in June worries investors. One of the parties in Mongolia’s
shaky coalition government said it would pull out before the
vote, and politicians are under constant pressure to be seen to
getting a good deal for the country from resources investors.
The priority for Mongolia is the development of its tiny
economy, and foreign investors want to know if the government
can create a stable legal environment while handling the
pressures exerted by impatient citizens as well as its two giant
neighbours, Russia and China.
Following is a summary of key political risks to watch:
INVESTMENT POLITICS
Mongolia wants to launch a $3 billion initial public
offering of the Tavan Tolgoi or “Five Hills” coal deposit.
State-owned Erdenes Tavan Tolgoi had been planning to list 29
percent of the company in London and Hong Kong by May, but it
cannot until Mongolia’s parliament passes a securities law.
An initial proposal to hand development rights in the
project to China’s Shenhua, Peabody of the
United States and a Russian-Mongolian consortium was rejected,
and the government is trying to devise another deal that will
include Japanese and South Korean partners.
Erdenes will need to raise up to $400 million this year if
its planned float does not go ahead by December, a senior
executive said in March.
The government is under pressure to pass several new laws,
including the budget, an election law and judicial reforms, as
well as the investment agreement for Tavan Tolgoi.
It has abandoned its idea of renegotiating the contract for
the Oyu Tolgoi copper-gold mine, after earlier saying it wanted
to look again at a 2009 deal with Ivanhoe Mines. The
project will be taken over by Rio Tinto , which
already owns 49 percent of Ivanhoe and, as of mid-January, was
cleared to buy more.
Some politicians have called for the prime minister to
resign over his handling of the Oyu Tolgoi contract.
What to watch:
– Progress of new laws through parliament.
– Parliamentary elections in June. Shenhua Energy Co Ltd
, China’s largest coal producer, has said
its negotiations to invest in Tavan Tolgoi are likely to restart
after the vote.
– Whether the government can produce an investment agreement
for Tavan Tolgoi that will satisfy foreign partners and keep the
public happy, and whether it can do it in time.
– More inward investment. In November, commodities trader
Trafigura and private equity investor Origo Partners Plc
, formed a joint venture to develop Mongolian coal and
iron ore deposits for export, and in February Goldman Sachs
bought a 4.8 percent stake in a Mongolian bank.
THE RESOURCE “CURSE”
Mongolia’s dependence on mining has alarmed
environmentalists and opposition politicians, and the country is
already showing classic symptoms of “Dutch disease”, including
soaring inflation and high interest rates.
The government is trying to bring in structures that will
protect it against fluctuating commodity prices, and wants to
use the proceeds from mining to pay for infrastructure, health
and education, and develop other sectors.
It is under pressure to spread the wealth, and has already
extracted pre-payments from foreign firms involved in both the
Tavan Tolgoi and Oyu Tolgoi projects in order to give money to
the public.
What to watch:
– How Mongolia uses the income from its mining projects. It
has set up education and fiscal stabilisation funds, but it has
also promised direct dividends for Mongolian citizens.
– How it deals with rapid economic change as well as
inflation as foreign investment transforms the country’s mainly
rural economy. The International Monetary Fund warned in
November that Mongolia’s economic policies are creating
inflationary pressures.
GETTING ON WITH THE NEIGHBOURS
Many of Mongolia’s 2.7 million citizens are concerned about
growing Chinese and Russian influence, and their fears were not
allayed by the plan to hand the majority of Tavan Tolgoi’s
western block to Chinese and Russian interests.
China already dominates Mongolia’s economy, buying 90
percent of the country’s exports in the first half of 2011.
Mongolia’s reliance on Russia and China for fuel, power and
transportation also poses a major risk to its mining sector.
Russia has been known to turn off supply taps, and China is not
averse to closing crucial railway links.
Mongolia also depends on Russia’s railway network to fulfil
plans to deliver coal to Japan and South Korea. Mongolia’s plans
to build itself a railway network capable of transporting coal
to foreign markets is likely to be delayed, officials said in
February.
What to watch:
– Will efforts to ease dependence on China merely increase
Russia’s hold, and vice versa? Is the Chinese market for coal
and other minerals its only option in the short term?
– How will the government handle growing nationalist
sentiment, and fears about the role of foreign firms and
workers.
(Editing by Daniel Magnowski)
