The Uranium Shakedown: How Mongolia and Russia Conspired Against Western Investors Part 2

In the second installment of the curious case of Khan Resources, Phillip Hynes and Mark Burke document a deal with Russia’s leadership to swap Khan’s uranium mines for hundreds of millions of dollars in aid and debt forgiveness.
Even before Mongolia awarded itself the right to Khan’s uranium deposits, the writing was on the wall.
Speculation was rife that Russia was yearning for the influence it once had over Mongolia’s uranium deposits during Soviet times. The ambition was clear from Moscow’s growing control of the international uranium market, for which it already controls 12 percent of global reserves.
Overtures from Russia notched up after Mongolia’s 2008 election, moderately to begin with, and then more forcefully.
In an agreement that year, Mongolia committed to cooperate with Russia in identifying and developing its uranium resources. Vladimir Putin, as Russia’s revolving door Prime Minister in 2009, met with Mongolian President Tsakhiagiin Elbegdorj. Then in May of that year, Putin visited Mongolia for talks on participation in mining uranium. It was only two months later, in July, that Mongolia began expropriating licenses from companies like Khan under the cloak of the New Energy Law.
A month later, Russia’s President, Dmitri Medvedev, paid a visit to Mongolia, accompanied by Sergei Kiriyenko, chief of the Russian state’s nuclear energy company, Rosatom.
On that visit, Medvedev agreed to end a $150 million dispute over unpaid Mongolian debt “to move ahead with the Dornod [uranium] deposit”, which holds over seven times as much uranium as Russia’s total annual production. Tellingly, Khan Resources management was not even invited into the conversation despite the fact that the Canadian company had been developing the Dornod site since 2005 and legally owned 58% of the joint venture.
At the same time, Medvedev generously signed off on a $300 million loan for agricultural development. Prospective atomic and infrastructure deals were also thrashed out.
It doesn’t take a Mongolian horse-trader to understand that a sudden dispatch of $450 million in investment and debt forgiveness wrapped with promise of future infrastructure deals was being exchanged for an opportunity to win the Dornod license for uranium.

A History Of Bad Deals

After the expressions of Russian interest in 2008 and backroom deals of 2009 came high drama in 2010, with accusations that foreign investors were in breach of Mongolia’s laws.
Along with Russia’s objectives, Mongolia’s politicians had another motive – the manifestation of a national curse: resource nationalism.
This has been a constant throughout both the 2008 and 2012 governments, thriving on the fractious nature of existing parties, intra-party factionalism and the growth in the number of new populist fringe party entrants – especially ahead of the 2016 elections. Resource nationalism has been a common ticket to earning political capital and votes.
Acutely sensitive to dependency on foreign investor giants like Rio Tinto Group as well as China’s economy, interest from Russia has been seen as a useful counterweight, intertwining with the nationalist agenda. Blinded to the damage to foreign direct investment, nationalist legislation has flowed.
The following timeline shows the buildup of nationalist fervor, the sharpening of Russia’s focus on resource security and the legal proceedings between Mongolia’s government and Khan:


  • In January 2009, the Russian and Mongolian governments announce a joint venture tied to uranium extraction. Later that year, Russian state-owned company ARMZ submits a hostile bid for Khan Resources stock in Canada. Khan’s board rejects the offer.
  • In July and August, Russian president Medvedev and prime minister Putin visit Ulaanbaatar within a month. The stated reason for both trips was to pursue control of the Mongolian uranium market.
  • Mongolia introduces the “Law to Prohibit Mineral Exploration and Mining Operations at Headwaters of Rivers, Protected Zones of Water Reserves and Forested Areas” – aka “the Long Name Law.” In essence, it bans mining in environmentally sensitive areas, imposing constraints particularly on gold. This nod to pastoral nationalism – or nomadism – proves highly indicative of what’s to come.
  • The passage of Mongolia’s new Nuclear Energy Law leads to the suspension of all 106 of the country’s existing licenses. Re-registration for those licenses is required the same year.
  • Russia steps up its focus on uranium as a national security objective.


  • In January, Mongolia’s parliament passes a law giving the government an uncompensated 51% stake in any resource extraction project with which it was involved.
  • Russia’s Pravda publishes report on Dornod project in Mongolia titled “Russia To Receive Control Over Uranium.”
  • The Mongolian government places a moratorium on all new mining licenses.
  • Seeing the situation develop against them, Khan Resources begins negotiations with the China National Nuclear Corporation (CNNC) to be acquired. The move spawns protectionist anti-Chinese sentiment within Ulaanbaatar and enables the Mongolian government to revoke Khan’s mining license.


  • Khan announces its lawsuit against Mongolia’s government for $326 million, citing the “expropriatory and unlawful treatment of Khan in relation to the Dornod uranium deposit.” Mongolia challenges the tribunal’s jurisdiction over the claim.


  • In Mongolia, anti-Chinese sentiment builds ahead of the Parliamentary elections, with parties using nationalist sentiment to foment opposition against foreign investment.
  • The Strategic Entities Foreign Investment Law (SEFIL) is passed in May, just before the elections. More than anything, this shamelessly protectionist and reactionary law was responsible for Mongolia’s abrupt fall from grace among foreign investors. It gives the government leverage against any foreign state-owned enterprise looking to dominate Mongolia’s natural resources. The enactment coincides with a proposal from the Aluminum Corporation of China (popularly known as CHALCO) for a deal that would have provided them with control of Oyu Tolgoi, Mongolia’s largest ‘super-mine’ and one of the world’s largest resource extraction projects.
  • An international tribunal is reported to have agreed with virtually all of Khan’s arguments and concludes that Mongolia is in breach of obligations under its Foreign Investment Law. As a consequence, Mongolia also falls afoul of the multilateral Energy Charter Treaty.


  • Mongolia abruptly cancels all 106 exploration licenses issued to foreign and domestic companies between 2008 and 2009, with no legal recourse given. This follows a corruption investigation, in a somewhat contradictory process that was intended to revive investor confidence.
  • Khan’s appeal for the right to pursue a $300 million claim against ARMZ, the Russian mining arm of Rosatom, is dismissed by Ontario Court
  • The disastrous Strategic Entities Foreign Investment Law (SEFIL) is repealed following the collapse of FDI, yet government approval requirements and other restrictions remain for state-owned foreign investors. The new ‘Invest Mongolia’ Agency now has full authority for approving acquisitions by foreign SOEs of over 33% of a Mongolian asset
  • The Mongolian government attempts to communicate a message of equal treatment for local and foreign investors, yet xenophobia and resource nationalism threaten a different reality. A crescendo of acidic rhetoric toward foreign investors, particularly its nemesis Rio Tinto in the Oyu Tolgoi standoff, continues to build within the national media.
  • 2015

    • Of the 106 licenses, 42 are found to have been obtained illegally, 29 are returned to former holders, six are sold to new owners and five become property of the state.
    • An international tribunal orders Mongolia to pay Khan Resources $100 million, an amount in line with previous offers made for the Dornod asset (notably from China’s CNNC in 2010), plus interest and costs.
    • “The Mongolian government, in order to protect its own interests, will work for the invalidation of the arbitration award,” the Justice Minister says. The country launches a formal appeal in France.
    • Mongolia lifts the June 2010 moratorium on new exploration licenses. The exploration licences area, however, is cut from 400,000 ha to 150,000 ha.
    • Rio Tinto and the government settle their dispute, triggering a no-confidence challenge for the Prime Minister, which he survives. The two sides then sign a $4.4 billion package to restart the Oyu Tolgoi project. The deal comes six months ahead of elections, in which addressing the lack of foreign investment is a major campaign issue.


    • Mongolia’s Finance Minister announces it will pay Khan $70 million by May 15 to end its dispute. In exchange, Khan agrees to stop pursuing court certification of its award in the U.S., which could allow it to seize Mongolian commercial assets there. The settlement comes a week ahead of the Toronto mining convention. Canada is the biggest direct investor in Mongolia after China.

    The curious case of Khan Resources concludes tomorrow as Phillip Hynes chronicles events leading to the stripping of the company’s Mongolian assets and its chairman’s mysterious death in an Ulaanbaatar hotel.

Phill Hynes and Mark Burke are analysts at ISS Risk, a frontier and emerging markets political risk management company covering North, South and Southeast Asia from its headquarters in Hong Kong


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