A sudden sense of economic crisis is spoiling the mood over Mongolia’s three years of world-beating economic growth. This crisis stems from the huge decline in foreign investment and ongoing uncertainty surrounding the partnership with Rio Tinto in the Oyu Tolgoi mine project. In the coming week, two events will seek to address this crisis.
Mongolia is on an economic fault line. Growth rates of 10+% for the past three years, at a time when the world is still struggling to climb out of the post-Lehman hole, have not only brought rising incomes to many Mongolians and spawned a construction boom in the capital Ulaanbaatar but also have focused the world’s attention on Mongolia in a new way.
This growth has been built almost entirely on mining exploration, coal production and construction associated with the Oyu Tolgoi project. Now, however, growth seems threatened by three challenges: nervous foreign investors; a drop in Chinese demand for coal; and uncertainty surrounding Oyu Tolgoi. Foreign investment – apart from Rio Tinto’s engagement in Oyu Tolgoi – has fallen precipitously since the passage of a foreign investment law in May 2012. The relative slowdown of the Chinese economy, meanwhile, has led to a steep decline in purchases of Mongolian coal.
On top of this, Mongolian politicians and the public have been grappling with the implications of being a part-owner in the Oyu Tolgoi project and the governance and financial challenges that this ownership implies. Oyu Tolgoi represents the economic future, but also the thorny challenge of trying to balance the population’s expectations of immediate and equitable benefits, the need for foreign expertise and financing, and environmental stewardship. The challenges have found their expression in public disputes with Rio Tinto over the Oyu Tolgoi construction budget just as the project is poised for production. These disputes have led to a financing crunch that has forced the company to suspend underground construction and to let 1,700 workers go.
Over the next week, two events in Ulaanbaatar will address the crisis brought about by the Oyu Tolgoi job losses and the tanking of Mongolia’s currency, the tugrik, by roughly 20% since the triumphant oversubscription of a Chinggis Bond last November. The first is a workshop, led by the World Economic Forum’s Strategic Foresight team, with Mongolian decision-makers and stakeholders, which will examine future scenarios and possible policies. The likely focus will be on Mongolia’s mining and related industries, and the country’s main customer, China.
The second event is parliament convening for an extraordinary session to discuss the revision of the foreign investment law, as well as proposed changes to the mining law. Hints about the provisions of the foreign investment law suggest that it will retain controls over state-owned investments but clarify these to create less hindrances for the sale of assets by non-state-owned foreign investors. Specifics of these revisions will show whether they will actually be significant enough to lead to a return of investment, especially if discussions of the mining law remain at a relatively early stage.
Neither of these initiatives addresses the ongoing challenges surrounding Oyu Tolgoi, which is governed by an Investment Agreement.
While the lack of research capacity to support decision-making has been lamented in the past, it has become glaringly obvious in the current discussions of governance structures, construction budgets and the integration of Mongolia into global financial flows. A radical investment into such analysis capacity and into governance structures directly involving the Mongolian people may be one of the few solutions here.
Alternatively, a sale of the state’s share in Oyu Tolgoi would not only allow the company access to financing, but also shift the government’s responsibility to that of regulation and of decision-making about revenue streams that now seem threatened.
To continue on its path of rapid economic growth and development, Mongolian leaders will have to take decisive action on mining regulation and Oyu Tolgoi. In this, they will need the backing of the Mongolian people who continue to enjoy a vibrant democracy. Consideration of long-term scenarios and solutions for a lack of policy analysis capacity and governance challenges will play a crucial role in selecting courses of action.
A version of this article was originally published by the Wall Street Journal Asia.
Julian Dierkes is an associate professor at the University of British Columbia’s Institute of Asian Research (IAR). He is participating in the World Economic Forum’s Strategic Dialogue on the Future of Mongolia.
Image: A woman walks past make-shift homes on the outskirts of the Mongolian capital city of Ulaanbaatar. REUTERS/David Gray