Geopolitics queers the pitch for those wishing to do business in Mongolia

Mongolia sits atop billions of dollars of mineral wealth and its economy is poised to grow rapidly, but foreign investors are finding that geopolitics hangs heavy over business in a nation caught between China and Russia, says a Reuters analysis. Few companies are more aware of the perils of investing in Mongolia than Canadian miner Khan Resources, now battling the might of Russia for the rights to a uranium deposit in the country"s remote northeast.

Khan"s licenses for the Dornod uranium property were cancelled after what it alleged to be a show of muscle by Moscow and Russia"s state-owned ARMZ Uranium, and it has now filed a lawsuit seeking to overturn the decision. But Khan itself had been planning to sell out to the state-owned China National Nuclear Corporation (CNNC), raising perennial Mongolian fears about Chinese dominance. However, the Chinese company dropped the planned acquisition last week. "We are right in the middle of a geopolitical war," said Grant Edey, a Khan company director, shortly after filing the lawsuit.

Khan insists it did all it could to comply with a series of changing ownership and registration requirements in Mongolia, but T. Bayarbayasgalan, the head of licensing at the country"s new Nuclear Energy Agency, said it did not do enough. "The company was raising capital in the name of Mongolian uranium resources, and the main reason why the licenses were cancelled was because it had violated many of our laws," he said. In particular, Khan violated an article in the new Nuclear Energy Law which stipulates that a company needs the permission of the Mongolian authorities if it intends to transfer its shares, he said.

Mongolia broke away from the crumbling Soviet system in 1990, and while it is struggling to stay neutral between its two giant neighbors, it may still be amenable to some Russian persuasion. China, on the other hand, relinquished any claim to Mongolia in 1950, but has done little to allay suspicions that its economic dominance could lead to political hegemony.

More than 70 percent of Mongolia"s exports went to its southern neighbour last year. The bulk of Mongolia"s oil is being produced by Chinese firms and most of the big projects now being developed -- including Ivanhoe Mines" USD5 billion copper-gold project at Oyutolgoi -- are also counting on surging Chinese demand. Plans are also under way to develop the Tavantolgoi coking coal mine, the world"s biggest untapped deposit of its kind. Project financiers are eyeing development of railroads to link the country"s major energy resource centers to energy-hungry markets in the north and south.

But it is always more than mere economics in Mongolia, economists and analysts say. "A country like Paraguay would die to have a market like China on its border, but there is this concern about the imbalance of populations and power," said Peter Morrow, chief executive of Khan Bank, one of the country"s biggest lenders.

Alan Wachman, an expert in Mongolian politics at Tufts University in the USA, says China has done nothing to Mongolia to warrant this level of anxiety. "But when I press Mongolians about this, they say there are plenty of people in China who say that Mongolia is fundamentally Chinese and that this suggests an intention that has to be taken seriously," he said. "They ask what are we to do given our size and power if the Chinese begin to act on it? It puts this whole thing in the realm of emotions rather than any kind of rational analysis."

More than 70 percent of Mongolia"s exports went to its southern neighbour last year. The bulk of Mongolia"s oil is being produced by Chinese firms and most of the big projects now being developed -- including Ivanhoe Mines" USD5 billion copper-gold project at Oyutolgoi -- are also counting on surging Chinese demand. Plans are also under way to develop the Tavantolgoi coking coal mine, the world"s biggest untapped deposit of its kind. Project financiers are eyeing development of railroads to link the country"s major energy resource centres to energy-hungry markets in the north and south.

At Khan"s Dornod property, Russia to the north and China to the east are visible from the nearby hilltops, illustrating the company"s fragile position as well as the country"s. Khan bought the abandoned Russian property of Dornod around a decade ago, company director Edey said, after coming to an agreement with the former owners and the Mongolian government.

But Russia has since sought a greater stake in a national uranium reserve estimated at 1.2 million tons. An agreement to explore the material was signed in 2008, and ARMZ last year set up a joint venture with Mongolia"s MonAtom to develop Dornod -- even though Khan Resources was already there. "They are now acting like they never sold them," said Edey.

While China"s CNNC had expressed interest previously, Edey insisted Khan"s legal problems long pre-dated the Chinese company"s involvement. Khan"s shares were already in freefall as a result of the licensing issues, prompting ARMZ to table a hostile acquisition bid and leaving Khan with no choice but to seek out a "white knight". In the end, a company like Khan didn"t have the clout to fight its own corner or negotiate the complex political challenges that face Mongolia.

A global intelligence analyst says, "Mongolia was looking at this push around the world to build new nuclear reactors and wanted to be the one controlling the sale of this resource, but it also wanted to offer it to Russia in return for a balance of power against China. In the end the Mongolian situation is one of excessive insecurity. It could be very realistic from a Chinese businessman"s perspective that this is pure business, but if you are Mongolian, how can you take the risk of putting even more of your business in the hands of the Chinese?"