COMMENT: Mongolia - a blue-sky opportunity

Roland Nash of Renaissance Capital
December 16, 2009


Mongolia is a country on the point of transformation. On the Chinese border, it has some of the richest mineral deposits globally. Mongolia has an economy about 25% smaller than Moldova's, with copper, coal, gold and uranium reserves rivalling those of Kazakhstan and Australia. As these resources are brought to market, Mongolia stands a good chance of becoming the fastest-growing economy in the world over the next decade.

The transformation will begin in 2010. The signing of a joint venture between the Mongolian government and the Ivanhoe-Rio Tinto alliance in October 2009, to exploit the Oyu Tolgoi copper mine, has set a precedent for the mining industry. The $4bn investment expected over the next nine years in this project alone is roughly equivalent to Mongolia's entire GDP in 2009. And there are several other projects with similar world-class assets.

Despite the scale of the mining projects, Mongolia remains remarkably underdeveloped. In a country the size of Western Europe, there are fewer surfaced roads than in Luxembourg (a country slightly smaller than Rhode Island). Mongolia imports a proportion of its electricity from Russia and much of its fresh produce from China. In the capital, Ulaan Baatar, Louis Vuitton, to much fanfare, opened a branch in October, yet there is very little class-A office space. Opportunities in the secondary industries, from banking to real estate, are arguably greater than those in mining. Resource endowment is not the only reason why Mongolia stands out.

It also has a quite different political and business environment from the rest of Central Asia. Unlike some of its neighbours, Mongolia has a genuinely competitive political system, with a free press and open elections. According to the World Bank, Mongolia ranks in the top third of countries in terms of ease of doing business - above Spain and Poland, and much higher than any of the BRIC countries.


Transition pains
A transformative natural resources windfall has proved a mixed blessing for many countries. Mongolia will face substantial economic dislocation in coming years. The mild populism of its democratic government has tended towards inflationary policy in the past, and its banking system, budget and monetary institutions are unprepared to absorb the scale of the likely change to the economy.

In the longer term, Mongolia faces the difficulty of managing the interests of its two big neighbours. Mongolia's longest border is with China. The three Chinese regions that directly share a border with Mongolia have a population of 74m, compared with Mongolia's 2.6m. The Chinese province of Inner Mongolia is 80% Han Chinese, yet it has a bigger Mongolian population than Mongolia itself. Mongolia's only other border is with Russia, a country that dominated it for 65 years from 1924. To maintain balance with its two neighbours, Mongolia is actively encouraging non-Chinese and non-Russian foreign investors.

Despite the challenges, the transformation of Mongolia now appears unstoppable. According to official estimates, over the next five years, production of coal will double, gold production will treble and copper output will quadruple. The economic transformation will prove a rare test of a largely free and competitive political system to handle a major natural resources windfall.

For portfolio investors, there are currently few investable assets in the country; but Mongolia's geography, geology and business environment make it, in our view, one of the most exciting investment environments among frontier markets.

Source:Renaisance Capital Group (equity research on Mongolia)
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12 comments:

  1. Why does anybody care if LV is in UB? It's just a store probably owned by some Mongolians. The laws already make it nearly impossible for a foreign owned company to be stationed here. The law forbids foreigners from any one country to exceed 0.33%. Any business done here must be mainly done by Mongolians for Mongolians. Most of the rest of the world trades with different people and exchanges goods. Foreigners can easily get a tourist visa, but not start any kind of business. How is Mongolia an opportunity for foreign countries beyond mining? Are they even allowed to do business, beyond selling things to Mongolian owned companies? For example, China has many McDonalds restaurants. Economics aside, is it even possible for a foreign company to come in and have a McDonalds restaurant? Starbucks near SuhBaatar Square? If not, then why say Mongolia is an opportunity (for foreign investors)?

    ReplyDelete
  2. Your comment shows level of your knowledge about Mongolia. LV is French. It rents space in the Central Tower owned by MCS.

    The law you mentioned is law on immigration. There are many foreign invested entities working in Mongolia. Just look around and talk to people. It seems you live in a closet.....

    ReplyDelete
  3. Bob,
    If Mongolia is not really attractive place, why Mongolia is called " the place to be with your money in 2010" and there are thousands of small and medium size businesses in Mongolia owned by Chinese, Koreans, Russians, North Americans and Europeans and Japanese. I would not use having McDonalds restaurant as measure of friendliness towards investment.
    I don't know that Mongolia banned McDonalds and Starbucks opening their branches in Ulaanbaatar.
    You have to ask your question "Why say Mongolia is an opportunity for foreign investors?" from Renaisance Capital Group which just released this report. I have seen the whole report and it is very optimistic on Mongolia.

    Ganbat, editor of MonInfo News Service

    ReplyDelete
  4. First of all, if the population of Mongolia is 2.7 million, the total number of foreigners in Mongolia cannot exceed 27,000. The total number of Koreans cannot exceed 8,910. I'm in Mongolia. Mongolians told me I'm too optimistic about Mongolia. I mean if there were 2 equal Oyu Tolgoi mines in the US (or Russia) and Mongolia, they would have developed the one in the US (or Russia) first, because the taxes are probably at least 10 times higher in MGL. The only reason IVN is willing to pay the 33% plus extra for a limited time, is because it's super rich. I mean the US and other countries already mined those kinds of easy opportunities. MGL has the mining resources that countries need. They can afford pay taxes of 33% and more only because it's a once in a lifetime unusual case. The other 99% of mines in the world cannot support 33%+ gov't taxes.

    "the place to be with your money in 2010". This is exactly what I mean. Your money goes to Mongolia, but not the actual foreigners running a foreign-owned business in the Mongolia, but rather foreigners investing in Mongolia from their office in Japan, US, Russia, Korea, etc.

    ReplyDelete
  5. As an example: you can buy Coke in Mongolia. Most of it is not bottled or sold by Coke, the global corporation. The recipe for Coke was licensed to MCS, the Mongolian company. Was it opportunity for Coke? Perhaps. Did any foreigners move their operations into Mongolia with managers under the original company name? Not as far as I can tell. If you go to Sky Shopping center you can buy a lot of Korean brands. How many of the Korean companies have offices or factories in Mongolia besides shipping points hiring Mongolians. I'd bet almost none. Feel free to name a few that I'm missing. You can buy Snickers bars in Mongolia. Snickers or the parent company does not have offices with foreign managers in Mongolia. Snickers bars are made in Russia, and only shipped to Mongolia on a train and sold to Mongolian distributors. The "opportunity" for the foreign companies was not to have offices in Mongolia, but to simply have a Mongolian selling point in Mongolia. "Opportunity" could be there, but depends on how you define it, so people should not be confused that many foreign companies are setting up offices in Mongolia. Yes, DHL is in Mongolia, but probably with a special agreement that it is not actually DHL, but a Mongolian owned company in Mongolia contracted to operate under the DHL logo. This is not to have any illwill; I like Mongolia, but we have to clarify what "opportunity" is. In the US foreign companies can set up in the US and do business. They just have to pay things like income tax. In Mongolia a small business (actually just the one person) must pay a $100k investors visa to start up. That has already scared away foreign business.

    ReplyDelete
  6. I highly doubt you'll see any international Coke employees at MCS or French employees at the LV store. They just license the logo and the store is a shipping point. If you consider that an opportunity for foreign companies, it seems pretty limited to me, like CEOs of global corporations are reading this blog bloated with Google ads.

    ReplyDelete
  7. Bob or Honeyspizza,
    I can see you are one person as your ID address is same..... Why you keep on changing your name when you post in our blog.... If you don't like our blog, it is ok. Just stop visiting it..That is all.

    MonInfo News Service

    ReplyDelete
  8. Anonymous, if you are offended by LV being in MGL, where did you get your computer that you posted here? If you believe what you say, then shouldn't you throw it out, since there is no computer manufactured in Mongolia? Why have an English language web site anyway?

    FYI, Your authentication function in your web site doesn't work consistently. I have to switch id's.

    I am challenging what you are saying. You say there are many opportunities in Mongolia. For who? Just licensing brands for use by Mongolians in Mongolia is a very limited opportunity. The last time I checked an investors visa costs $100,000. If you want to have a business in any other country, they don't charge that much to do business. Just because Al Gore said he invented the internet doesn't make it true. I hope to build a future in Mongolia. I'm the only one commenting here, and you're driving me out, while posting messages about the many opportunities and welcome place. The only opportunities are for people outside the country to sell through Mongolian distributors, which I don't really see as a wide opportunity. Do you really want open dialog, or a more Stalinesque style where no different opinions are tolerated?

    ReplyDelete
  9. Well, bob or honeyspizza whoever you are. Your comments shows that you are very ill-informed person who has some problem with Mongolia or Mongolians. I don't know what your problems are.

    Investors visa does not cost $ 100,000. Here again you are misleading. You have to check with non-Mongolians who are running businesses in Mongolia...Check http://www.mongolia-properties.com (real estate company owned by an American) and http://icmc-mongolia.net/ (management company owned by Americans)-he may even assist you in obtaining investor visa, http://www.amsterdam.mn and www.mongolia-web.com (run by Dutch enterpreuners) for advice and help. I feel that you are an frustrated person who is having problem with obtaining investor visa or setting up business in Mongolia. Good luck!

    By MonInfo News Service

    ReplyDelete
  10. Bob/Honeyspizza,
    Goal of this blog is to deliver unbiased, accurate news reports and information to the world by Mongolians.

    We (contributors) all have our own jobs and in our free time, we update the blog.

    What is wrong with Mongolians writing in English in blogspot space with Google ads?

    By MonInfo News service

    ReplyDelete
  11. To Bob,
    You are quiet good manipulator. I was never offended by LV being french. I just said it is French owned. That is all. You are twisting my comment. I'm not anti-foreign Mongolian. I welcome all foreigners. No problem with foreigners. Live and let live is my motto.It is you who are attempting to put foreigners against Mongolians or visa versa. Check my comments. Nothing against foreigners.
    Nowadays, nationality of employees is not that important. Internet, globalization, English language made all of us equal. For many foreign owned businesses it is best to have local employees with same skill and education as those back home. Besides, importing workers from home would be expensive and costly. Businesses can not cope with high cost.I see you lack simple economic understanding!!! Sony Entertainment is Japanese owned, but many of its staff are American. Like MonInfo said, you are having problem with Mongolians and Al Gore!
    Why I have to toss away my computer? I'm not mad at world and foreigners. It is You who are mad at Mongolia and Al Gore?

    You must be a whining loser from Chicago pretending to be Christian missionary/English language teacher in Ulaanbaatar, Mongolia?
    You want to be investor here in Mongolia? Follow laws of Mongolia. I know Mongolia is not heaven. It has its problems and faults.

    That does not give you right to attack Mongolia and Mongolians! Why you have this hate of Mongolia inside of you when you are married to Mongolian woman? I saw from your blog (now gone) that you are married to Mongolian woman! Now you removed your blog....

    ReplyDelete
  12. Honeyspizza/Bob,
    It seems you don't understand or like franchising (use of established logos and brands by businesses) in Mongolia. Transfer of knowledge and technology and logos are not new thing nowadays....MCS is paying fee to Coca Cola for its use of the technology and logo. No doubt about it.
    If LV uses all french employees here in their store, they can not make much profit. In order to be competitive and make profit, they have to hire local Mongolians. Probably have french staff in key, technical positions to oversee the local Mongolian employees. That is how businesses operate all over the world.Nothing new about it.

    ReplyDelete

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