Can Mongolia Shape the Modern World Once Again?

With the U.S. as its partner, Mongolia could make a significant contribution to the region.

By Roncevert Ganan Almond

The Tuul River snakes through the southern edge of Ulaanbaatar, Mongolia’s sprawling capital city,  coiling westward until discharging into the Orkhon River near the center of the Orkhontuul sum and, ultimately, flowing into Lake Baikal in Siberia, the Arctic, and beyond. Like the Onon and Kherlen Rivers, the Tuul originates in the Khentii Mountains near the sacred Burkhan Khaldun, or “God Mountain.” According to The Secret History of the Mongols – Mongolia’s oldest literary work, chronicling the story of Temujin and his rise to become Genghis Khan (Chinggis Khaan) – the slopes of the Burkhan Khaldun served as a place of refuge, worship, governance, and ultimately burial for the world conqueror.

In the telling of anthropologist Jack Weatherford, Chinggis Khaan was more than an unprecedented and fearsome military leader: He was a nation-builder who embraced the rule of law, protected religious freedom, promoted international trade, and established new diplomatic relations among the great population centers of Asia and Europe. The Mongolian empire connected a formerly disjointed world by creating a “single intercontinental system of communication, commerce, technology and politics.” Due to Chinngis Khaan, the “globe was shaken” and a new order commenced, the historian Edward Gibbon observed.

Today, Mongolia’s reach may be less grand; but while the country faces significant challenges both domestically and regionally, Mongolia remains poised to shape the modern world. Indeed, with the United States as its partner, Mongolia can overcome its obstacles and contribute to building a “free and open” Indo-Pacific.

Tough Neighborhood  

Mongolia must deal with substantial structural challenges. As a landlocked country with a population of only three million, the difficulty begins with geography.

All goods leaving or entering Mongolia must traverse the territory and airspace of its two more populous and powerful neighbors, Russia and China. The Trans-Mongolian Railway – Mongolia’s chief rail network – is single-track, extending nearly 700 miles from the Russian border in the north to the Chinese border in the south. When entering China, trains must switch to a new gauge, a time-consuming process.

The Russian government holds a 51 percent stake in Mongolia’s railway, an interest which hinders the development of a more efficient rail transport network. In 2016, Russia sold it 49 percent stake in Erdenet copper mine, which historically served as the country’s most important economic engine. But Moscow maintains a tight grip on the economy, supplying 90 percent of Mongolia’s energy (refined oil). This influence extends to other spheres as well. A walk through Ulaanbaatar reveals the lasting cultural legacies of Soviet rule, from the opera house to the wedding palace to the socialist murals of the Zaisan Memorial.

On the southern border, sharing the wind-swept sands of the Gobi Desert, is China. Approximately 6 million ethnic Mongols live in China’s Inner Mongolia—twice the population of Mongolia proper. With the world’s second largest economy, China receives approximately 90 percent of all Mongolian exports – such as coal, copper and other ores, crude oil, and unprocessed cashmere – and supplies Mongolia with more than one-third of its imports. China is also the country’s single largest source of foreign investment. In the words of a Congressional report, China is “Mongolia’s economic lifeline.”

This dependency has created tensions with China that spill over into other areas. For example, Mongolia has historic links to Tibetan Buddhism and the Dalai Lama, a title first created by Mongolian leader Altan Khan in the 16th century. In retaliation for the Dalai Lama’s visits to Mongolia, China has temporarily shut its borders with Mongolia and, in 2016, enacted tariffs on Mongolian products. After forcing a promise from Ulaanbaatar not to invite the Dalai Lama in the future, China’s foreign ministry boasted: “We hope that Mongolia has taken this lesson to heart.” 

Expanding the Geography

One lesson learned is to expand the neighborhood. Mongolia has turned to “third neighbors” – aligned countries that do not share contiguous borders with Mongolia – for economic engagement and strategic support.

For example, through strong relationships with democratic third neighbors such as Japan and South Korea, Mongolia is working to strengthen stability and cooperation in the region. Uranium-rich Mongolia has been active in supporting nuclear non-proliferation and the peaceful resolution of disputes in Northeast Asia. In this regard, Mongolia, which balances diplomatic ties with both North and South Korea, has sought to foster stability on the Korean Peninsula. In early June, during the 6th Ulaanbaatar Dialogue on Northeast Asian Security, Japanese delegates actively sought out North Korean counterparts to lay the foundation for future negotiations on denuclearization of the nearby Korean peninsula. Japan’s efforts are particularly noticeable after the collapse of American summit diplomacy in Danang; although Tokyo’s shuttle diplomacy may be more cautious after Japanese Prime Minister Shinzo Abe’s ill-fated trip to Tehran.

Mongolia describes the United States as its “most important” third neighbor and has leveraged its relationship with Washington to shape events on a global scale. For instance, in June, Mongolia and the United States co-sponsored the 17th iteration of Khaan Quest, a military exercise simulating United Nations peacekeeping operations involving contingents from 31 countries, ranging from Australia to Zambia. Admiral Philip S. Davidson, Commander of U.S. Indo-Pacific Command, arrived in Mongolia to open the event and underscored the geopolitical significance of Mongolia. Khaan Quest also supports the country’s ongoing participation in United Nations global peacekeeping operations(around 10 percent of Mongolia’s armed forces are serving in oversees UN peacekeeping operations). The interoperability and capacity of the Mongolian military has also been strengthened through important contributions to U.S. military and coalition campaigns in Afghanistan, Iraq, and Kosovo.

Ulaanbaatar and Washington have also supported shared goals and values in partnerships on the international stage. For example, Mongolia has held the chairmanship of the U.S.-supported Community of Democracies, an intergovernmental organization based in Warsaw that advocates for common democratic values. The countries have also cooperated in the ASEAN Regional Forum. At the United Nations, Mongolia has proven a reliable ally of the United States, consistently voting with the U.S. in General Assembly resolutions. Mongolia has also curried America’s favor by enforcing U.N. Security Council sanctions targeting North Korea’s unlawful nuclear and ballistic missile programs, as recognized in the recent U.S. Department of Defense’s Indo-Pacific Strategy Report.

At the same time, Ulaanbaatar has sought to leverage its position to facilitate discourse between Washington and Pyongyang. Over the years, the Ulaanbaatar Dialogue has provided a discrete forum for track one and track two diplomacy. As the only country in Asia to transition from communism to democracy and as a verified “nuclear-weapons-free” zone, Mongolia would be an intriguing locale should there ever be another U.S.-DPRK leadership summit.

The weight of American power also affects the balance of Mongolia’s third neighbor policy. Specifically, Mongolia has reportedly resisted becoming a full member of the Shanghai Cooperation Organization (SCO), led by Moscow and Beijing, due in part to the signal it may send to Washington and other Western capitals. Similar deliberations and ambivalence impact Ulaanbaatar’s potential participation in China’s Belt and Road Initiative (BRI). Indeed, by strengthening ties with the United States, Mongolia can resist the “push and pull” of the region and chart its own course in foreign affairs.

Strengthening the Bond

During Mongolian Prime Minister Ukhnaagiin Khürelsükh’s official visit to Washington in September 2018, the countries announced the U.S.-Mongolia Expanded Comprehensive Partnership, which signaled a deepening of the bilateral relationship, particularly in economic and commercial ties. The timing was appropriate. Since 2013, with the drop in global commodity prices and China’s economic slowdown, Mongolia has experienced a relative economic slump. Ulaanbaatar’s skyline may be dotted with tower cranes, but, according to my conversations with locals, many of those construction projects have been stalled since the earlier boom period.

American foreign investment and trade can provide a means for lifting Mongolia’s economy. On June 3, 2019, in Ulaanbaatar, during a meeting of the American Chamber of Commerce for Mongolia (AmCham), U.S. Ambassador Michael Klecheski highlighted several challenges for achieving this objective.

First and foremost, Mongolia must resolve and make clear its position on Oyu Tolgoi, the mega-mining project in the south (commonly referred to as “OT”). OT is jointly owned by the Government of Mongolia (34 percent) and Turquoise Hill Resources (66 percent, of which Rio Tinto owns 51 percent). Access to what may be one of the largest copper deposits in the world could be a boon for Ulaanbaatar, which relies on mining revenues to fund at least 30 percent of the national budget.

However, in a bow to economic nationalism, Mongolia’s Parliament has called for renegotiating the terms of OTto seek an increase the government’s ownership stake, thereby injecting uncertainty into the regulatory environment and delaying implementation of the mining development’s second phase. In addition to United States Export-Import Bank financing, the U.S. government must also consider its 35 percent American equity-ownership stake in OT. U.S. Ambassador Michael Klecheski described OT as a “bellwether” for foreign investors – a test of the prospect for tapping the country’s estimated $1.3 trillion mineral wealth, the very future of Mongolia.

Second, Washington is seeking full implementation of the bilateral Transparency Agreement, signed in 2013 and entered into force in 2017. Designed to improve Mongolia’s investment climate, the agreement makes new laws and regulations affecting international commerce subject to a 60-day public comment period and requires those laws to be published in English, similar to the U.S. federal rulemaking process. The Office of the U.S. Trade Representative (USTR) described the Transparency Agreement as representing the “first time that the United States has concluded a stand-alone agreement addressing transparency in matters related to international trade and investment.” During discussions under the Trade and Investment Framework Agreement (TIFA) in April, the USTR raised concerns that Mongolia was behind schedule in setting up the electronic system for notice-and-comment rulemaking and Ambassador Klecheksi raised the issue again at the AmCham meeting.

Third and more broadly, Mongolia must show progress in battling corruption making regulatory decision-making less opaque. Transparency International, the non-governmental organization that measures public corruption, ranked Mongolia 93 out of 180 countries under the 2018 Corruption Perception Index, alongside Kosovo, Macedonia and Albania in Eastern Europe and Panama and Columbia in the Americas. In its most recent statement on the investment climate, the U.S. Embassy in Ulaanbaatar urged Mongolia to “stem constant, non-transparent amending of legal and regulatory rules, which frustrates Mongolia’s ability to stabilize its business environment and risks losing the FDI Mongolia needs to grow” by taking steps such as “[rooting] out the pervasive corruption threatening the foundational institutions of democracy.” Such actions would also help Mongolia with demands called for under its program with International Monetary Fund.

The United States is attempting to assist in the public reform process by training judges and prosecutors and awarding a second Millennial Challenge Corporation compact. Worth $350 million, the compact will support economic development by improving the water supply of Ulaanbaatar. But more can be done. For example, through the Global Procurement Initiative, the U.S. Trade and Development Agency can assist Mongolia with instituting best practices for procurement and avoid the “debt traps” and corruption that may be associated with other forms of infrastructure development in the region. In addition, Washington can explore using new authority under the so-called “BUILD Act” – signed into law by President Trump last September – to provide alternative investment sources and technical assistance for infrastructure projects.

Interestingly, the U.S. Congress has taken the lead in furthering the economic bond with Mongolia. On April 10, 2019, Congressman Ted Yoho (R-FL) re-introduced the Mongolia Third Neighbor Trade Act (H.R. 2219), which authorizes duty-free treatment for certain articles imported from Mongolia, namely cashmere wool. Mongolia produces over a third of the world’s raw cashmere, but most Mongolian raw cashmere is exported to China, and the United States buys nearly all of its cashmere products from China. Through this legislation, Congressman Yoho and like-minded bipartisan allies like Senator Ben Cardin (D-MD) are seeking to bypass China, increase trade between the United States and Mongolia, and strengthen Mongolia’s economic sovereignty. AmCham members visited Washington in late June to meet with the Trump administration and Congressional leaders to push for the new law. Jay Liotta, who serves on AmCham’s advisory board and has been on the ground in Mongolia for the past two decades, described to me the significance of the legislation: “The Third Neighbor Trade Act will build a direct relationship between the American consumer and the Mongolian people, who currently rely upon the industry to provide income to over 100,000 people, 90 percent of whom are women, and 80 percent of whom are people below the age of 35.” Indeed, if Mongolia is to build its future, consolidate its democracy and avoid the resource curse, the country will need to diversify its economy, and the United States is in a position to help.

Old Story, New Image

If you follow the Tuul’s stony riverbed to the outskirts of Ulaanbaatar, you arrive at Chinggis Khaan International Airport. In the terminal, above the comings and goings of the modern world, hangs a portrait of the 13th century hero with a benevolent gaze. One irony is that Chinggis Khaan himself never allowed his own portrait to be drawn during his lifetime, so his serene repose is merely artistic fancy. Another is that the impact of Mongolia on the contemporary globe, if not misunderstood, is widely underappreciated.

This legacy, like the future of Mongolia, is changing before our eyes. After nearly 70 years as a Soviet satellite state, the country has made a peaceful transition to democracy and embraced free market reforms. Mongolia is now authoring a new chapter in world history. In partnership with the United States, Mongolia can retell an old story with a new image – that of a 21st century state that upholds the rule of law, promotes tolerance, encourages international trade, and bridges diplomatic relations among divided nations. With the promise on its horizon, beneath its eternal blue sky, perhaps Mongolia will someday be said to have left the world “shaken” once again. That would be an irony worth pursuing.

Roncevert Ganan Almond is a partner and vice-president at The Wicks Group, and adjunct professor of law at Georgetown University Law Center in Washington, D.C. He has counseled government authorities in Asia, Europe, the Middle East, Africa, and the Americas on issues of international law. The views expressed here are strictly his own.

Source:https://thediplomat.com

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Mongolia’s growth challenges

Author: Gan-Ochir Doojav, the Bank of Mongolia

The government of Mongolia has been implementing the IMF’s three-year arrangement under the Extended Fund Facility since May 2017. The government’s program aims to stabilise the economy, reduce the fiscal deficit and debt, rebuild foreign exchange reserves, introduce measures to mitigate the boom-bust cycle, and promote sustainable and inclusive growth.

Mongolia has made progress in strengthening its economy under this program. Since 2016, the economy has experienced a sharp recovery in real GDP growth, mainly driven by stronger volumes and advantageous prices of coal and copper, a high foreign direct investment (FDI) inflow for the second phase of the Oyu Tolgoi copper and gold mine, and a recovery in domestic confidence.

As a result of the strong growth in exports and FDI, gross foreign-exchange reserves increased 3.5 times, reaching US$3.8 billion. Due to booming tax revenues and relatively contained expenditures, the fiscal balance has improved and public debt has fallen to 75 per cent of GDP. In the first quarter of 2019, year-on-year GDP growth was 8.6 per cent and the inflation rate has been stable at around its target of 8 per cent.

The banking sector continues to be of concern for financial stability. As the banking system constitutes over 90 per cent of the financial sector, it is important to raise banks’ loss absorption capacities, particularly through strong capital bases and adequate supervision. To this end, the Bank of Mongolia (BOM) conducted an extensive asset quality review (AQR) of all of the country’s commercial banks, per the European Central Bank’s guidelines, to determine the overall health of the banking system. The results of the AQR led the BOM to develop important regulations relating to risk-based supervision, capital adequacy and asset impairment. Running a follow-up to the AQR is the top near-term priority in the financial sector.

Recently, the BOM has taken measures to tighten monetary and macroprudential policies. Consumer credit growth has been too fast, rising 55 per cent in 2018. Its impact on the balance of payments puts upward pressure on the exchange rate and limits progress in reserve accumulation. The sharp increase in household debt has also raised concerns about its sustainability and possible risks for the banking sector.

In response, the BOM tightened the policy rate to 11 per cent in December 2018, and in January 2019 introduced a debt service-to-income limit of 60 per cent and a consumer credit maturity limit of 36 months. The hike in the policy rate and tightening of macroprudential ratios have started to decelerate household credit growth and will help to protect households from unsustainable debt burdens. The BOM is currently working to introduce more comprehensive prudential tools, which can better ameliorate the destabilising impacts of large-scale financial flows, credit concentration and financial dollarisation.

Though the economy is in a stronger position, the benefits of the economic recovery have not been shared widely. Since 2016, the poverty rate has fallen by only 1.2 percentage points to a still high 27.4 per cent last year. Real GNI per capita in domestic currency terms has not grown since 2014 and in US dollar terms it has been sharply decreasing since 2013. This is evidence of important domestic distribution of income issues in the sense that very few residents are benefitting from the mining sector and a significant amount of the revenues generated from the country’s high GDP growth are paid back to non-residents. Considering this fact, it is important to ensure that the return of economic dynamism benefits all of Mongolia’s citizens.

The outlook for the Mongolian economy is relatively strong but it remains vulnerable to external and internal shocks. Mongolia’s narrow economic base — 90 per cent of the country’s exports are minerals and more than 50 per cent of FDI is in the Oyu Tolgoi mine project— makes it highly exposed to changes in external conditions. Almost 50 per cent of business cycle fluctuations in Mongolia are driven by external shocks such as in FDI, global commodity prices, commodity demand and Chinese growth shocks. The short periods of domestic upswing that are driven by positive changes in global commodities demand are nevertheless limiting opportunities to achieve more sustainable growth.

As adverse external shocks hit the economy, monetary policy is loosened and purpose-built budget spending is deployed, but government debts inevitably increase. What’s more, pressure on the balance of payments has resulted in substantial exchange rate depreciation, loss of foreign-exchange reserves and a deterioration in the climate for FDI.

Accumulating sufficient buffers is the key to building resilience against these shocks and ensuring strong and inclusive growth. At present, however, the balance sheets in key sectors of the economy — government, the central bank, households, banks and companies — are not strong enough and are vulnerable to exchange rate shocks. Given the challenges, it is important to take advantage of the current favourable economic environment to continue building fiscal and foreign-exchange reserve buffers, strengthening the financial sector, improving the investment environment, and pursuing sound macroeconomic and structural policies.

Dr Gan-Ochir Doojav is Chief Economist and Member of the Board of Directors of the Bank of Mongolia.

Source:www.eastasiaforum.org

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Mongolia needs to diversify to avoid recession

By Jeremy Luedi

Mongolia is suffering from an over-dependence on mining as global commodity prices and demand from China decrease: diversification is urgently needed.

Having capitalized on the global commodity boom, and its proximity to a ravenous China, Mongolia has until recently seen rapid economic growth. As Chinese growth forecasts in the coming years sink towards the mid single-digit range, Mongolia enters 2016 skirting with recession.

Mongolia seeks to bolster finances

As commodity exports dry up, Mongolia is faced with a revenue shortfall. On March 14th, the government received a $250 million loan from Credit Suisse. Furthermore, Mongolia also recently issued $500 million in government bonds, in order to raise needed capital. Taken together, the new bonds and Credit Suisse loan represent efforts to raise funds equivalent to 6.5% of GDP.

These are vital cash injections, as Mongolia has seen its GDP growth rate drop from a high of 17.5% earlier in the decade to just 0.1% for 2016 and 0.6% for 2017, according to the Asian Development Bank (ADB). Ayumi Konishi, director general of the ADB’s East Asia department sums up the situation facing Mongolia.

“Consistent fiscal policy, effective continuing efforts to diversify the economy, and ensuring social protection are important challenges of economic management in Mongolia. In this light, the decline in the country’s consolidated deficit from 11.4% of GDP in 2014 to 7.9% in 2015 is a commendable achievement, although further steps are needed.”

Problems in the mining sector

Mongolia’s mineral wealth is well documented, and accounts for 94% of the nation’s exports. This over-reliance was feasible during the days of heady commodity prices and double digit growth rates in China, but is increasingly causing problems. As commodity prices have dropped, foreign investment in Mongolia has effectively dried up. While economic factors are limiting extractive sector growth, political and public tensions are also exacerbating the issue.

Divisions in Mongolia’s parliament saw the government block a development proposal from an international mining consortium (including China’s Shenhua, and Japan’s Sumitomo) in 2015. On March 30th, thousands demonstrated in Ulaanbaatar, protesting the unequal distribution of wealth that has arisen in the wake of the nation’s mining boom. Opposition lawmaker Battulga Khaltmaa, spoke to the crowd, “our wealth is being shipped outside of [the] country. Where is that money going?”

Despite the billions from mining concessions, one third of Mongolians still live in poverty, with Battulga arguing that around two dozen families associated with both the ruling Mongolian Democratic Party and opposition Mongolian People’s Party are reaping the rewards. Through their ties with the state run Mongolian Mining Corporation, listed in Hong Kong, a small group of elite families are profiteering from Mongolia’s mining dependence.

Battulga and his supporters are especially critical of Rio Tinto’s $5.4 billion Oyu Tolgoi copper mine, as the mine’s expansion has been bogged down by government demands for more money. Similarly, there is opposition to efforts to revive the Tavan Tolgoi coal mine, as mine income is seen as only benefiting local elites. This is not the first hurdle faced by Tavan Tolgoi, as the mine saw a $4 billion expansion deal fall through in Q3 2015 due to slowing demand in China.

Other efforts to jumpstart mining in Mongolia have met with similiar opposition, such as the government’s plans for increasing uranium mining. In 2015 the government issued three uranium mining permits to French mining firm Areva, with production slated to begin in 2017. This endeavour has drawn protests from locals, and does not bode well for Areva, which was already forced to cease operations in 2013 due to local opposition.

Environmentalists and local advocacy groups in Mongolia are also protesting efforts by the government to join the 1994 Nuclear Safety Convention and 1997 Joint Convention on the Safety of Spent Fuel Management. If Mongolia accedes to these treaties it will be obligated to accept and dispose of nuclear materials which originated from Mongolia. Opponents claim that Mongolia does not have the capacity or resources to do this.

It is likely that the government is considering joining these conventions in order to make it attractive to Russia and China; two major nuclear energy users. Mongolia may be trying to position itself as an attractive location for nuclear waste management, thus seeking additional income from user countries. This may find fertile ground as environmental concerns among Chinese citizens pressure Beijing to export its waste to quell public anger.

Mongolia seeks to diversify economy, faces hurdles

Commodity price volatility has highlighted the need for Mongolia to diversify its economy. To this end, Mongolia has received a $60 million loan from the ADB to improve the country’s credit guarantee system. According to ADB country director for Mongolia, Robert Schoellhammer “the project will help…Mongolian SMEs get more access to finance from commercial banks which will help diversify the economy.” With the ADB’s help, the Credit Guarantee Fund of Mongolia will offer $432 million in SME sub-project loans.

Despite the monies from said fund, SMEs in Mongolia are facing many hurdles. For instance, Mongolian SME’s are facing headwinds from new government VAT legislation that came into effect January 2016. Under the new guidelines, businesses are able to recoup 20% of their VAT expenditures, yet must do so by providing receipts from a standardized cash register. Many small Mongolian businesses do not use receipts, and as such are unable to receive the tax refund.

Furthermore, Mongolia’s tourism sector; which accounts for 9% of GDP, has potential yet requires more support. Tourism to Mongolia has risen from 55,000 in 1997 to 476,000 in 2012, with the government aiming for a million annual visitors by 2020 – an ambitious target in a country of barely three million people.

Currently, Mongolian tourism firms are facing a decline in visitor numbers are their two largest tourist source countries – Russia and China – are facing difficult economic times. Sanctions and low oil prices in Russia, and slower domestic growth in China are leading to fewer visitors. Furthermore, Mongolia’s relative isolation is a major problem for its tourism industry: Chinggis Khaan International Airport only has direct connections to nine destinations. That being said, flagship MIAT Mongolian Airlines is expanding its fleet by 40%, adding two Boeing 737-800s.

Lastly, to add to Mongolia’s worries, the country is experiencing a zud or a severe winter in which many livestock die due to an inability to graze. Estimates of livestock death are around 1.2 million for the 2015/2016 winter, with Mongolia receiving UN relief to aid communities suffering from the die-off.

Mongolia mineral wealth to population ratio gives it the potential to create prosperity for all its citizens, yet sustained flourishing remains predicated on stable economics and diversified risk.

Source:http://globalriskinsights.com/

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Mongolia’s rocky travails of mineral wealth

Author: Jargalsaikhan Mendee, UBC

Having held its first multi-party election in 1990, Mongolia is a democratic outpost in a tough authoritarian neighbourhood. Thus the country enjoys a wide spectrum of political and economic support from developed democracies. Political power has been transferred peacefully between two contending political parties, civil and political rights are respected and public discontent is freely expressed. Moreover, Mongolia overcame a daunting economic transition from socialism with the assistance of international financial institutions and donor countries like the United States, Japan and Germany, and with help from its own agricultural economy, shuttle traders and foreign remittances.

In the 2000s, the commodities boom seemed to promise a windfall for this fledgling democracy, which possesses mineral resources such as gold, coal, copper and uranium. But, in retrospect, the boom is where things started to go wrong.

The minerals boom reduced international pressure on Mongolia’s democracy. In the 1990s, democracy was a strong currency that attracted Western political and economic support, which in turn served as a source of domestic legitimacy for Mongolian political elites. In the absence of economic and military (geo-strategic) interests, the West’s embrace of Mongolia was purely ideological. It was also clear to Mongolian political and business elites that any move toward authoritarianism would lead to isolation, the least desirable option for Mongolia. International isolation, for a smaller, peripheral state, naturally increases its dependency on its powerful neighbours.

The minerals boom attracted the interest of global and regional mining giants and supply businesses, the majority of which are capable of influencing foreign policy agendas in major capitals. Since 2000, all high-level talks between Western and Mongolian dignitaries have overwhelmingly focused upon mining investment and related infrastructure development. At the same time, the minerals boom has provided opportunities for local political and business elites to engage in rent- and fame-seeking competitions. Mongolian politicians wanted to be involved in major mining and infrastructure development deals mostly to advance their parochial and private interests.

The minerals boom intensified unhealthy competition among politicians, parties, political-business factions and interest groups over political power and state resources. Since 2007, the collective wealth of Mongolia’s parliamentarians has increased markedly based on self-reporting. In 2012, parliamentarians’ collective wealth was equivalent to 7.6 per cent of GDP. But it does not stop there. Violating the constitution and the law, they have attempted to assert their influence in the cabinet, ministries, agencies, state-owned enterprises, and even in the judiciary and law enforcement by appointing political party-affiliated individuals. Certainly, this provides more opportunities to advance their interests and to marginalise their opponents.

For a new democracy, this leads to a deeply politicised and nepotistic state bureaucracy, which is vulnerable to any changes on the political landscape following elections or changes in the balance of power of political forces. Worse still, the state bureaucracy becomes less effective in both enforcing laws, rules and regulations and in serving as a gatekeeper against parochial or private interests. As a result, groups aim to profit as much as possible while leveraging their influence with new politicians in order to remain unaccountable for their past behaviour. In this cosy relationship, no one wants to talk about accountability.

The minerals boom triggers public discontent for three reasons. First, foreign investors and politicians promote false hopes of sustainable economic growth, increased employment and spill-over benefits from the mining industry. But they usually remain silent about the mining industry’s ‘maximum profit at minimum financial cost’ approach or that a politician’s primary motivation is to remain in office. In order to gain popular support, mining companies provide the government with upfront payments. Governments borrow in expectation of continued economic growth, but politicians largely spend these funds carelessly as they expect a continuous inflow of large sums in mining royalties and taxes.

Second, exploitative mining results in major negative impacts on the environment, especially where regulatory and enforcement mechanisms are weak. Like in any developed state, people in Mongolia do not want to see extensive, unregulated mining activities in their backyard, since it disturbs the natural environment and peoples’ livelihoods. While the major polluters are typically small- and medium-sized Mongolian and Chinese mines, as well as illegal ‘ninja’ miners, the only way to get government officials and politicians to act in favour of environmental protection is to use major Western investment projects as leverage.

Third, mining generates rents from licensing fees, taxes and royalties, but the process of awarding, collecting and distributing revenues is not as transparent in developing states. As seen in the Mongolian experience, it usually results in mismanagement and widespread corruption. This ignites public discontent and also provides rent-seeking opportunities for political and civil society actors and movements.

If investors and politicians follow only profit motives and their short-term interests, mineral wealth will easily accelerate the ongoing institutional decay in Mongolia’s democracy even though the commodities boom is likely to peak in the coming years. To save Mongolia’s democracy, instead of attempting to bend the rules in their own favour, politicians must take the rule of law seriously by bringing themselves under the laws, rules and regulations that they themselves approve. This would restore trust in democracy, strengthen the state bureaucracy and assuage public discontent. The alternative is opportunistic behaviour, blame-game tactics and a deceptive democracy.

Jargalsaikhan Mendee is a PhD candidate in political science at the University of British Columbia. He has served as Senior Fellow at the Mongolian Institute for Strategic Studies and Defence Attaché to the United States.

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