Mongolia makes tracks to escape neighbour

In October, a train with 30 coal wagons left Ulan Bator destined for the Russian port of Vostochny, the first rail freight service to link the Mongolian capital with the Pacific coast. It took four days to travel the 4,769km.

Waved off by Russian and Mongolian dignitaries, the train was important because of where it did not go. The coal came from Tavan Tolgoi, a vast and largely untapped reserve in the South Gobi Desert, which also happens to be less than 200km from the border with China.Landlocked and long ignored, Mongolia is using an instrument of 19th-century geopolitics – railway-building – as a means of navigating 21st-century globalisation.The country is at one of the sweet spots of the global economy. It sits atop huge deposits of the commodities that China needs to feed its growth. Yet Mongolia is also one of the countries most unsettled by China’s rise. Having freed themselves from Soviet rule two decades ago, Mongolians fear they will be smothered by China. To avoid becoming captive to Chinese demand, Mongolia is planning an expensive rail network to link into Russia, its Pacific ports and, beyond that, to other Asian markets.

“The opportunity to go to an eastern Russian seaport provides us with some comfort,” says Sukhbaatar Batbold, Mongolia’s prime minister. “We want to create a balance of interests among the partners working with Mongolia.”

Mongolia’s insecurity is an acute version of the anxiety that is starting to be felt across Asia, and which could yet become a barrier to China-led integration of the region.

The dynamism of the Chinese economy has never been more attractive in Asia. China’s urbanisation plans and growing consumer market are likely to make it the anchor of the regional economy for several decades to come.
Yet amid signs that China is more determined to flex its diplomatic muscles, Mongolia is not the only Asian nation worried about being pushed around. South Korea, Japan and Vietnam have all strengthened military ties with the US over the past year.

As well as Tavan Tolgoi, southern Mongolia also boasts Oyu Tolgoi, a huge deposit of copper and gold. Even before these mega-mines begin production in earnest, China is already taking 70 per cent of Mongolia’s exports.

With only one railway line crossing the Chinese border, some of this trade must go by truck along precarious roads. A private company had been planning to build a short rail link running south from Tavan Tolgoi to China. Instead, Mongolia’s parliament approved a very different plan – a 1,500km rail link to the north-east, where it will connect with Russia’s Trans-Siberian network. New lines to China are still planned, but priority has been given to the Russian connection.

As Elbegdorj Tsakhia, Mongolia’s president, puts it: “We need more doors to our neighbours.”

In a symbolic touch, the new track will use the Russian 1,520mm gauge, rather than the smaller standard used in China and elsewhere. (Russia also has a 50 per cent stake in the Mongolian rail network.) Trains to China will need to pause at the border for the cargo to change chassis – an operation that can take hours.

The plan has been criticised by external experts. The World Bank estimates it costs three times as much to transport resources from the new mines to Russia than it does to China, while profit margins on exporting to the rest of Asia via a Russian port could be less than a 10th of those earned by transit through China.

But supporters of the Russia rail project point to Beijing’s treatment of the one rail line already linking China and Mongolia. Mongolia’s dominant religion is similar to Tibetan Buddhism. When the Dalai Lama, the exiled Tibetan spiritual leader loathed in Beijing, visited Ulan Bator in 2002, Chinese authorities closed the rail link for more than a day, stranding passengers.

The rail link to Russia is part of a broader industrial strategy. It goes through Sainshand, a city where the government wants to build a copper smelter and oil refinery as part of a push to retain more of the economic value from its resources.

“China’s growth brings us a huge chance to develop and prosper,” says Sanjaasuren Oyun, a former foreign minister. “But we do not want to simply become the raw material supplier to just one country.”

While Soviet policies caused huge devastation to Mongolian society, Mongolians also remember centuries of conflict with China. The instinct to play the two giants off against each other is deeply ingrained.

“Mongolian society has a sense of cultural alienation from China and fears that growing economic dependence on its powerful neighbour might evolve into political subservience,” says Munkh-Ochir Dorjjugder, researcher at the Institute of Strategic Studies in Ulan Bator. “This outweighs all rational calculations of the immediate economic benefit and dwarfs any advice or opinion of western experts.”

Yet while Mongolia is fixated on the perceived threat from China, the country of just 3m people spends just as much time discussing how it will spend all the money from its China-related boom.

Ulan Bator has become one of the many mining boomtowns spawned by Chinese demand. Construction cranes dominate the skyline.

Before the financial crisis, Mongolia went through its own form of resource populism. As western societies became obsessed with rising house prices, Mongolians tracked the soaring copper price. Mongolia’s two main parties outbid each other to award cash payments from future mining revenue: when one offered each citizen $800, the other offered $1,200. “There is an old saying about dividing the skin of a bear before it has been hunted down,” says Ms Oyun.

When the crisis caused commodity prices to slump, Mongolia found itself facing a budget shortfall and a humbling visit to the International Monetary Fund for a $232m loan, which has now been repaid.

Since the crisis, a coalition government comprising the two main parties has pushed through two important reforms designed to control rash spending of its commodity dividend. Based on the experience of Chile, a fiscal stabilisation fund will set aside money for long-term development.

The economy will also have to navigate the capital inflows that will start from 2013, when operations at the two large mines in the south start to ramp up. The central bank is trying to develop tools to prevent sharp currency appreciation, which could damage non-mining sectors. As Lhanaasuren Purevdorj, governor of the central bank, says: “Our currency war begins in 2013.”

Source:Financial Times, newspaper of UK