The country that is likely to grow faster than any other in the next decade, and how it is changing, for better or worse
Jan 21st 2012 | OYU TOLGOI AND ULAANBAATAR | from the print edition
“GOIN’ to OT?” drawls Andy, a burly tattooed man with that worldly air common to those who have done time in the American army. The gate at Incheon airport in South Korea is packed with travellers, mainly Mongolian expatriates on their way home, waiting to board a flight to Ulaanbaatar. Andy’s is a fair guess as to the destination of one of the few other Western passengers. “OT”—Oyu Tolgoi, or “Turquoise Hill”—is in the middle of nowhere, a desolate spot in the Gobi desert, another hour-and-a-half’s flight south of Ulaanbaatar (inevitably, “UB”). But it is the site of the biggest foreign-investment project in Mongolia, a copper-and-gold mine that is springing up at a remarkable speed and is expected, by 2020, to account for one-third of Mongolia’s GDP.
For Andy, who normally “does security” in places such as Afghanistan, Nigeria and Somalia, OT is a rest cure. Conditions are comfortable, the locals are a delight, and nobody tries to shoot him. And there are the transits through UB, a veritable Bangkok of the steppes—at least if your comparators are Kabul and Mogadishu. In the OT bus from UB airport into town, Andy is on tenterhooks waiting for the overnight hotel allocation. He is delighted with his billet—one where overnight guests are readily tolerated. The other news is less cheery: the airport bus will leave at four in the morning.
UB is a boom town on the frontier of global mining. Hotels are bursting; the Irish pubs, of which there are several, are heaving with foreign miners, investment bankers and young local women with very long legs and very short skirts. French bistros serve steaks the size of tabloid newspapers. Dozens of cranes punctuate the skyline. The streets, empty 20 years ago, are now clogged. It is hard to believe on the clear sunny mornings the city enjoys much of the year, but UB’s air is now as polluted as anywhere—second only to the Iranian city of Ahwaz, according to a recent study by the World Health Organisation. In the winter, when temperatures average from -10 to -30 centigrade, and often fall to -40 at night, UB burns a lot of coal.
Another sign of a boom is the effort to keep the city functioning through these crippling winters. When a Singaporean firm was building a joint-venture brewery to make Tiger beer, it was so anxious to finish in time for the summer-drinking high season that it hired patio heaters the size of jet engines for the construction site. Without such aids, building stops in the Mongolian winter. It is too cold to pour concrete.
A glitzy mall on the corner of the main Sukhbaatar Square houses the sort of establishments you come across in the better class of airport: chic boutiques, pricey restaurants, expensive-watch shops and, of course, an outlet of Louis Vuitton, which sells posh luggage. The shops usually look empty, which is reassuring for those nostalgic for the UB of the recent past—small, drab and poor, and offering its visitors, as one unhappily put it, a choice of “mutton, mutton and mutton”, but at least refreshingly different from other capitals.
Central Tower, as it is known, is a new ornament to downtown Ulaanbaatar. It is built next door to the lot where once stood the former headquarters of the former Mongolian People’s Revolutionary Party, the MPRP (it has since dropped the “R” word), which for seven decades until 1990 ruled Mongolia as a one-party state and rock-solid Soviet satellite. The building was burned down in rioting in 2008 after a disputed election. The use to which the site has now been put is as good a symbol as any of the new aspirations of Mongolia’s ruling class.
Dreams under your feet
To pay for these dreams, Mongolia is being dug up and sold to China. Already, more than 80% of its exports are minerals, a proportion expected to rise in a few years to 95%. Mongolia makes mining geologists salivate over its known riches and unexplored potential—for copper, coal, gold, silver, uranium, molybdenum, and on and on. Some 3,000 mining licences have been issued.
It is not just that Mongolia is a treasure-chest of geological wealth. It is slap-bang next to the world’s biggest and fastest-growing market for most minerals. Put together Mongolian supply and Chinese demand, and Mongolia will be rich beyond the wildest dreams of a population many of whom, a generation ago, saw themselves as nomadic herders. With just under 3m people, Mongolia has a chance of becoming a Qatar or a Brunei: a country that has only a small population but almost all of it, in global terms, loaded. Brian Fisher, an Australian economist who has conducted a study of the economic impact of OT, says Mongolia “sounds like Australia in 1930”.
In the third quarter of 2011 Mongolia’s economy grew by 21% compared with the same period in 2010. Even sober economists think the country is going to have to get used to this sort of thing. The IMF expects growth to average 14% a year between 2012 and 2016. In 2013, the year production is due to begin in earnest at OT, it is forecast to reach 22.9%. Others think it will be at least twice that.
Indeed, OT is the force driving many of these short-term projections towards the sky. Its construction is a big factor in this year’s boom. From 2013 its sales will start adding an average of about five percentage points a year to the national growth rate up to 2020, when its impact on the economy will peak. By November last year over $3 billion had already been spent on OT, a figure that will rise to $6 billion by 2013 and $10 billion by 2020. For Mongolia, a $6 billion economy, this is enormous.
So is the scale of the logistical challenge of building one of the world’s biggest copper mines in the middle of the desert. All supplies have to be brought in by road, from China to the south. Some 18,000 workers, including about 10,000 Mongolians and 6,000 Chinese, have to be housed and fed. Water had to be found, and is to be piped from an underground aquifer over 50km (32 miles) away. Electricity is to be provided first from China, then by a purpose-built power plant. And local people have to be compensated, coaxed and cajoled into believing that the mine is in their interests, not just those of the foreigners who are running it.
The project is a joint venture between the Mongolian government (34%) and Ivanhoe Mines of Canada (66%), which is in turn 49% owned by Rio Tinto, the mining giant that is managing OT and has put up most of the money. Already the Turquoise Hill, where the colour of the soil first betrayed the presence of copper to prospectors decades ago, has vanished. A huge pit is opening up for the first phase of the mine. Two shafts have been sunk for the second, underground, phase. On top of one, a tower is soaring. It will be the tallest structure in the Gobi, and perhaps in Mongolia. The workers are housed in long prefabricated buildings or, for the luckier ones, traditional gers, circular felt tents (equipped with untraditional en suite facilities, TV and Ethernet cables).
All this is justified commercially by the expectation that this mine will produce 450,000 tonnes of copper a year, making it one of the world’s five biggest mines, as well as being a big gold producer. And it will have a life of at least 50 years. The more they look, the more potential geologists find in the area. It will be what Rio calls a “first-quartile” mine in terms of costs—ie, among the cheapest. And its proximity to China means that the cost of transport should not be prohibitive. The price of copper is especially vulnerable to swings in market sentiment. But global supply is constrained, and barring global economic Armageddon, demand is not going to collapse.
Yurts revisited
OT, however, matters not just in itself, but as a test of Mongolia’s ability to work with foreign investors to pull off such mammoth undertakings. Next in line is Tavan Tolgoi (Five Hills), the world’s biggest untapped coal deposit, also in South Gobi province. Notional shares in this project have already been distributed (electronically) to every Mongolian born before March 31st 2011. With a general election due in 2012, this adds political urgency to an ambitious scheme to raise billions of dollars for the mine through an initial public offering of shares in Ulaanbaatar and London. This will double the market capitalisation of the sleepy UB stock exchange.
Mongolian coal production is expected to increase from about 16m tonnes a year now to 40m by 2020 and 240m by 2040. Again China provides a ready market, but the mining boom has exacerbated Mongolian fears of a Chinese takeover by commercial stealth. So feasibility studies are under way on the costly options of building railways to take coal to Russia, and thence out to Korea and Japan via Vladivostok, or to Dandong on the Chinese-North Korea border and thence by sea to South Korea.
A touch of Dutch on the steppes
Not everyone in Mongolia looks at the growth projections and goes giddy with delight. Many worry about the economic, environmental, social and strategic costs of becoming “Minegolia”. Economists fret about a “resource curse”, or “Dutch disease”. If even the Netherlands can be vulnerable to this—whereby wealth floods in as natural resources are exploited, pushes up the exchange rate, inflation, or both, and renders other industries uncompetitive—how is poor Mongolia to cope? And the Netherlands never had a year like the one Mongolia can expect in 2013, when the economy will grow by a quarter and the current-account balance will lurch from a deficit of 14% of GDP into surplus.
Furthermore, Mongolia, a 20-year-old democracy, is prone to populist policymaking. Even as the economy is booming, political parties are tempted to promise handouts. After pledges made at the previous election, every Mongolian, rich or poor, gets 21,000 togrogs ($16) on the 15th of every month. The big parties have declared a no-handout pact ahead of the next election, and the government has set up a “fiscal-stability fund” to smooth the commodity cycle. But the temptation to dip into the till will mount as voting nears.
For economists, the resource curse is a risk Mongolia has little option but to take. As Mr Fisher, the Australian economist, puts it, its comparative advantage is in commodities and mining services. There is no point in trying to compete in manufacturing with “the biggest factory on the planet” next door in China.
Mongolia is still a desperately poor country. It has just graduated, in development-bank speak, to “lower-middle-income” status, with a GDP of around $2,000 per head. The population of UB has expanded by 70% in the past few years, to about 1.2m now. Some poor people still spend the winter nights beneath the streets (open manholes are a pedestrian hazard), huddling near the pipes for warmth. The city is sprawling outward through valleys in all directions along dirt roads lined with clapboard fences, behind which former herders live in gers.
One such herder, given the name Igor by Russians he knew in his youth, describes a common life path. A few years ago, herding in Central province, he lost many of his sheep to a dzud, one of the periodic climatic disasters that hit Mongolia—a summer drought that results in too little pasture and too little hay for the winter, followed by heavy winter snow and colder-than-usual temperatures. Igor sold the rest of his livestock to pay for his children’s schooling, bought a pickup truck and moved to UB, where he makes a living hiring it out. He finds UB going from bad to worse, as more people come to town and scramble to earn money. All there is to look forward to is the summer pilgrimage home, to drink airag (fermented mare’s milk) with his friends in a ger.
It is not just the weather that drives herders into town. Some are mining refugees, fleeing environmental devastation. Besides the licence-holders Mongolia has tens of thousands of illegal gold prospectors, known as “ninja” miners because the green plastic bowls they carry on their backs to sift for specks of the metal make them look like mutant turtles. Their use of mercury and cyanide has poisoned rivers.
Mongolia’s most flamboyant environmental campaigner is a former herder called Tsetsegee Munkhbayar. He made his name helping clean up the Onggi river, and then for his extreme forms of protest, involving shooting at mining equipment or vehicles. In April 2011 he led a group of supporters into Sukhbaatar Square on horseback to demand talks with the government. Mr Munkhbayar, a grim-faced man looking out of place behind a desk in his UB office in knee-length boots and traditional jacket, believes that if Mongolians exploit the mines, “we will never develop.” He suggests an alternative future of herding, dairy-farming and tourism. As he talks he is interrupted by a loud blare of traditional Mongolian music. It is the ringtone on his mobile.
And not a drop to drink
One UB resident, visiting the OT site as an interpreter for a foreign journalist, cannot stop herself from weeping at what is being done to the area and to her country. For the outsider, the bleak brown desolation of the Gobi is not a landscape that evokes sympathy. And it needs an awful lot of Gobi to sustain a flock of goats and camels, so, vast though the OT project is, the number of herders directly affected is small. But the translator sees ruin: “You can’t drink copper; you can’t drink gold.”
In fact, the aquifer tapped for OT is too deep to affect surface water, too saline to pass human-consumption standards and so big it will be no more than one-third depleted after 50 years of the project. The big danger environmentalists see from its use is that even a future natural drought may be blamed on OT. It will be hard for the project to deny water to distressed local herders. That might lead to overgrazing.
The way it was
Such a massive undertaking is bound to distort the local economy and disrupt the environment. Compared with the ninjas, the multinationals and the development banks that will help raise the largest-ever project financing for mining can at least claim to be part of the solution. They are conducting impact assessments and bio diversity studies. The project is also providing jobs, and creating more employment for locals through subcontracts.
But it will struggle to be popular. Oyun Sanjasuuren, an independent member of parliament, says mining is bound to be political because it is “the main thing in the country”. And the face of Mongolian mining over the past 15 years has been “mostly ugly”. Miss Oyun says she entered parliament as a centrist, but now finds herself on the right as the main parties have shifted steadily to the left. OT has not been helped by tactless remarks made in the past by Robert Friedland, Ivanhoe’s boss, about “the cash machine we intend to build”, and how nice it was to have so few people around and “no NGOs”.
The wealth generated by the miners is an obvious target. And the militant Mr Munkhbayar has many fans even among young urban Mongolians who moan that development is arriving too slowly. Like him, they wish it could come from some other industry. Every herder, says one environmentalist, hopes that at least one person in his family will carry on the life. But that may be changing. Twenty years ago it was hard to meet anyone in UB who identified with the city. Even if they were born there, they saw “home” as the “aimag”, or province, from which their parents came. Now a new generation of city-dwellers feels less attached to the countryside and to nomadic herding traditions. Their numbers are swollen by young people returning from an overseas education to chase the new opportunities the mining boom is throwing up.
One such, a young man called Damdin, is finding life difficult. After 15 years in Fairfax, Virginia, he has forgotten most of his Mongolian. He left Mongolia with his mother, who was fleeing his alcoholic father. At school in America the other Asian students were scared of him, despite his short stature; Mongolians, he says, have the reputation of being psychos. Now back in UB, living in a ger with his father who spends his time playing games on Facebook, his ambition is to open UB’s first skateboard shop.
When The Economist encountered him, outside a derelict Buddhist temple in a gerdistrict in the middle of the afternoon, and later at the nearby police station, he had just been punched and robbed of his phone by friends of the friend he had lent it to (“It was 4G, man!”). He was drunk, despite saying he is always teased as a wuss for sticking to beer when real men drink vodka. He was cradling a little street-puppy he had rescued from his muggers, knowing his grandmother would not let him take it home. He presented as forlorn a picture as could be imagined of the pain and dislocation of being caught between two worlds. But he said he had no intention of going back to Virginia.
from the print edition | Briefing
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