Policy Series: A Typical Quick Solution – ‘Let’s Change It’ Syndrome (III)

In retrospect, the most common methods for dealing with policy failures have been first to blame each other – politicians, parties, factions, and civil society activists in addition to geopolitics and global economy and second to change policies without asking the hard questions. These questions would be why is there a need to change; what part of the policy is working or not working; why did it fail; what would be the short, medium, and long term impacts of a policy change; what are the optimal, win-win options; and what would be the most agreeable implementation for all stakeholders. I call this blaming and uncritical policy change a ‘let’s change it’ syndrome that increases mistrust among all actors, including the policy makers, and promotes into ‘vicious cycle’ of cheating and competition to change the bargaining dynamics.

So, why do policymakers in Mongolia prefer the ‘let’s change it’ attitude? It seems to be structural. The current political settings are so much dependent on the four-year electoral cycle – since all key policymakers and enforcers – president, parliament members, prime minister, cabinet members, governors, and local assembly members – are changed every four years. Their time horizons are short and competition for being re-elected are costly. That means they need to blame their opponents as soon as possible in order to gain the power and authority to maintain their own patron-client networks. Instead of calculating the long-term benefits of stable policies, they prefer to change the rules of the game (i.e., the laws and regulations) to create a favorable operating environment while blaming their opponents for any policy failures. As a result, we witness sudden policy changes immediately after changes in the political landscape. Like other parliamentary democracies, the political landscape of Mongolia is changed not only after presidential, parliamentary and local elections, but also by the cabinet changes (e.g., non-confidence voting results). Because the policymaking institutions and process are heavily dominated by these political actors with short-time horizons, the policymaking in Mongolia becomes unstable, unpredictable, non-inclusive (divisive) and non-transparent.   In an ideal country, where policies are stable, predictable, inclusive, and transparent, policy changes are incremental, continual build on the achievements of previous policies, and increase the certainty for all stakeholders. But, in Mongolia, it is the opposite – politicians want to change it without substantial studies and discussions while their blame game usually ends up in conspiracy theories.

Mining policy faces the exact same challenges. Also, important to note, natural resources aggregate competitions among politicians, parties, and factions for a few reasons. First, natural resources, especially gold and coal, offer opportunities for a quick accumulation of wealth without much investment and technology; therefore, the majority want to exploit this ‘window of opportunity’ that combines a weak regulatory framework and demands of the Chinese market. Second, competition among foreign and domestic investors generate ‘rents’ for politicians, parties, and factions in return for political support (e.g., bidding, investment agreement, licenses, and tax loopholes). Third, major long-term investment deals will provide multiple benefits for politicians, parties, and factions (ranging from personal, factional, and to political prestige). Therefore, the mining sector not only becomes the target of political competition, but also suffers from effects of the ‘let’s change it’ syndrome when policymakers change laws and re-structure the policy-implementing and enforcing units

The first way the mining sector suffers is that politicians are strong inclinations to change laws and rules. The principal mining policy (i.e., the Minerals Law) has had two major revisions since 1997 and is waiting for the next major one.   At the same time, this law has been amended and revised multiple times, especially from 2009 annually. Some changes are understandable because of the passages of new laws like the Uranium Law and Law with the Long Name in 2009. But policymakers are still unable to produce substantial studies and reports on implementations of their previous legislation and potential implications of the proposed changes for the public. A few examples of failed mining policies also illustrate that policymakers are not so concerned with the quality of policies or the policymaking process; therefore, laws and rules are vulnerable to changes of the political landscape and power differentials of politicians, parties, and factions.

The other suffering of the mining policy results from the reshuffling and restructuring of the governmental units – ministries and agencies in charge of the coordination, implementation, and enforcement of mining policies. Despite the simple existence of ideal laws to insulate the government bureaucracy and bureaucrats from political, economic, and societal pressures, politicians, parties, and factions compete for having control over ministries and agencies. In other words, they neglect the existing laws and regulations pertaining to the government and public service. Politicians, parties, and factions first restructure and reshuffle ministries and agencies to accommodate their private, fractionalized interests and second appoint party-affiliated individuals to senior, mid-level and junior positions of the ministry, agency, and provincial (аймаг, сум) bureaucracy. As a result, party-affiliated officials aim to benefit within the four-year, or even shorter, election cycle. Consequently, these frequent structural and personnel changes complicate the policy coordination, implementation, and enforcement functions of those ministries and agencies. Thus contributes to mining policy failures – without giving a chance for any policy to be implemented. The key mining ministry and agency (i.e., the Mineral Resource Authority) and other relevant ministries and agencies in charge of the environmental protection, finance, taxation, inspection, and law-enforcement are all affected by the changes of the political landscape.

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Oyu Tolgoi on Track Again

Last week, this is what I tweeted

It looks like the day after is upon us, according to press reports and a series of Turquoise Hill press releases. Below are my initial comments, but note that these are based on the publicly-available information only, and are preliminary in nature.

What’s in the Agreement

  • On the question of outstanding taxes that had been assessed and in dispute, Oyu Tolgoi and the government seem to have agreed on a tax bill of $30m, without prejudice, i.e. without any admission of guilt on either side.
  • Oyu Tolgoi forgoes a 2% smelter royalty it had inherited from BHP Billiton.
  • There is a change to how the royalty on sales is calculated.
  • The management fees that Rio Tinto charges for operating Oyu Tolgoi are reduced from 6% to 3%.

What’s Not in the Agreement

Pending further announcements of details,

  • Any reduction in the 34% share in Oyu Tolgoi held by the government.
  • Any debt forgiveness or assumption of government debt.
  • Any significant changes to the royalty structure (in part because the 34% stake remained.

On balance then, I’m a little surprised that there are no momentous changes in the Oyu Tolgoi structure. It had seemed that both, Rio Tinto and the government, had lost faith in their partnership. While it was always clear that progress would ultimately benefit both sides tremendously, simply because of the overall size of the project, it seems that the results of negotiations have not reconfigured the relationship. Perhaps it was the process of negotiations itself that will allow this agreement to have some longer-term durability?

What’s Next

Various financing deals for the underground construction had expired, so negotiations for $4b in project financing will have to start anew. Given the fundamental economic soundness of the Oyu Tolgoi project, this should not be a huge hurdle.

Once financing has been established, Oyu Tolgoi should be able to ramp up underground construction in the course of the summer. A construction workforce will have to be recruited and machinery and materiel procured.

As construction gets under way, a Mongolian workforce will have to be hired toward operations at the mine.

For the Mongolian government, a number of issues that have come up over the last two years remain unresolved as the Oyu Tolgoi governance structure does not seem to be changing with this agreement.

When Erdenes Mongol looks at business operations at Oyu Tolgoi, how active will this holding company be? Presumably, there will not be any involvement in day-to-day operations, but in bigger decisions, is the state holding tasked with the maximization of financial benefits to the state, i.e. maximal revenue flows to the general budget, or does it take a more comprehensive and holistic view of operations? Is the holding run (at arm’s length, one would hope) by the Ministry of Finance or do ministries like environment, labour, etc. also get a say? For the long-term operations of this mine, answers to such questions will definitely be needed!

Economic Implications

The 2011 boom in Mongolia was built on construction activities at Oyu Tolgoi. I don’t see any particular reason why a boom should not result from the underground construction that will commence with the agreement that was reached.

While much of the construction-related employment may be foreign labourers and expats, construction will draw on local suppliers to house, feed and maintain a large workforce. Presumably, domestic air travel to Dalanzadgad will resume and a number of infrastructure projects will be accelerated further adding to a construction boom.

Also, presumably, the turgrik will either appreciate or at least hold its value (depending on the fiscal situation). Would there be any reason for inflation to decline other than a halt to the depreciation of the turgrik?

Other than the $30m tax bill, a construction boom doesn’t produce immediate revenue flows for the Mongolian government, if anything the agreement will strain government budgets more as the required investment will amount to up to $2b that the government currently doesn’t have. Open pit operations will continue and continue to generate revenues but not on a scale to finance the underground construction.

While Rio Tinto has obviously been persuaded by the negotiations that this agreement provides stability in the medium term, it seems unlikely that this would immediately reverse the decline of FDI into Mongolian. Mining projects already underway and undertaken by purely Mongolian-focused companies may be able to find financing somewhat more easily again and the associated activities might see a modest rebound of FDI.

But how has the mutual distrust between Rio Tinto and the government been overcome? While the agreement is a once-a-decade step for Mongolia, will it outlast the current decade? The 2009 Investment Agreements ran into trouble 4 years into its existence. Looking at that experience, it seems unlikely that FDI would rebound on a large scale.

Political Implications

For PM Saikhanbileg, the agreement is a huge victory, particularly since it comes just over a year before the election and there is some chance that voters will see positive economic results from this agreement by the time of the election.

This may not be enough to persuade voters to return the DP to power (in fact this still seems very unlikely at this moment), but it may soften the blow and allow Saikhanbileg to claim underground operations at Oyu Tolgoi as his legacy, more than the DP’s legacy, perhaps in the 2020 parliamentary election.

Since Saikhanbileg’s super-coalition was constructed with the goal of moving on large projects (Tavan Tolgoi appears to continue to be mired in a complex web of domestic business interests, contracts, and foreign relations), the signing of this agreement surely dooms the coalition sooner rather than later. It was never expected to outlast next winter, simply because parties wouldn’t want to go into the 2016 election with coalition partners lest they cannot establish the distinctiveness of political choices, but with this agreement out of the way (and everyone, including the MPP) being able to claim some credit for this, why should the MPP stay in this coalition?

The fiscal situation doesn’t improve significantly and that’s the DP’s mess to deal with. The construction and affiliated service industry boom that will be spurred by this agreement will happen relatively independently of government actions. Unless there is an unfortunate argument that the MPP and some of its prominent politicians want “in on the boom”, it would seem that this agreement would spell an end to the coalition though perhaps not before the parliamentary summer recess.

All in all, May 19 2015 will have been very significant to Mongolia’s development. While I had been feeling quite gloomy after my recent visit to Ulaanbaatar, this agreement changes everything. As I had previously argued, the Mongolian government has to “just” get Oyu Tolgoi right as the scale of this project will sustain capacity-building for other economic activities. None of this is guaranteed by this agreement, but it seems to be a positive step at least.

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Modigolia? Indian-Mongolian Relations post-PM Modi’s Trip to Ulaanbaatar

In the wake of Indian PM Narendra Modi’s visit to Ulaanbaatar should we expect a radical revamping of Indian-Mongolian relations? Certainly, you don’t send in the big dogs unless you mean business, right?

The Visit

Modi visited Mongolia on the invitation of the Mongolian PM Ch. Saikhanbileg from May 16-18th. This is the first visit from an Indian Prime Minister to the country, and was scheduled to coincide with the 60th anniversary of formal diplomatic relations between the two states. Conveniently, this also coincided with Modi’s Asia tour, and he came to Mongolia after a very successful visit to Shanghai.

In addition to formal meetings with Mongolian officials, Modi visited an IT school that India had funded in Ulaanbaatar, as well as a medical center. He was also treated to a cultural display modeled after Mongolian Naadam and presented with his very own Mongolian horse (something often organized for visiting heads of state).

In good diplomatic fashion, a slew of contracts, agreements, and MoUs were signed during his visit. Here is a short list of the various agreements that I was able to find:

  1. PM Modi and PM Saikhanbileg signed a new strategic partnership agreement
  2. India and Mongolia will jointly establish an “Indian-Mongolian Friendship School” in Mongolia
  3. They will establish a cultural program starting in 2015 and continuing through 2018
  4. Both sides agreed to foster connections between Mongolia’s Diplomatic Academy and India’s Foreign Relations Institute.
  5. The two states committed to advising meetings to discuss and exchange ideas on national security and defense
  6. India has extended Mongolia a $1 billion credit line.
  7. India and Mongolia have decided to intensified civil nuclear cooperation, especially with regards to cancer treatment applications.
  8. PM Modi and Mongolian President Tsakhiagiin Elbegdorj discussed ways of strengthening trade through agreements on shipping and logistics, energy, and taxation.
  9. There is also discussion of using the Gujarat Co-operative Milk Marketing Federation model to boost Mongolia’s dairy industry. (Modi was the chief minister of Gujarat before becoming PM in 2014, so the connection is not as random as it might otherwise seem).

Contextualized within the larger history of Indian-Mongolian relations, this is certainly not insignificant. This is another piece of in the puzzle of India and Mongolia’s neighbourly relations.

Three Kinds of Third Neighbours

India and Mongolia are neighbours? Surely, Brandon is failing at his efforts to learn geospatial analysis. But in all seriousness, Mongolia refers to India as its spiritual neighbour, one of many third neighbours, and increasingly as an ideological (democratic) neighbour. All three components of neighbourly relations were emphasized during this official visit.

Spiritual Neighbours

If one were to imagine an arc of Buddhism, extending from India, through Southeast, Japan, and China, Mongolia would be the northernmost section, and India and the southern most. Indeed, the first Indian ambassador to post-communist Mongolia was a devote Buddhist, and funded a number of monastery projects. It is no surprise then, that Modi’s first stop was to Gandan Monastery– one of the oldest surviving monasteries in Mongolia.

Let us not over state this religio-cultural relationship, however. Buddhism is not a broadly practiced religion in India, with Tibetan refugees and Tibetan peoples in Ladakh and elsewhere making up the vast majority of practitioners. India might be held in special esteem as a result of its connections to Buddhism, but Tibet is Mongolia’s real spiritual neighbour, with India a convenient second. Still, the rhetorical of “spiritual neighbours” is useful for providing additional justification to efforts at strengthening Indian-Mongolian relations, even in geopolitical calculations might actually carry the day.

“Third Neighbours”

“You always want to be the friend of the neighbors of your own most powerful neighbour,” I was once told by an official at the Indian Embassy in Ulaanbaatar. As is well known to readers of this blog, Mongolia’s execution of its so-called “third neighbour policy,” by which the country seeks to develop close relations with regional and global powers besides its two physical neighbours, has been shaky at best. Despite efforts to diversify trade, China dominates Mongolian exports, and Russia continues to dominate the list of imported goods. Indeed, Modi may have encouraged Indian companies to explore options in Mongolia, but that won’t make these companies more competitive against Chinese, North American, or Australian firms.

That said, there is reason to be hopeful that the third neighbour policy has succeeded in fostering diplomatic ties with a far wider range of actors than some may expect. India represents a particularly attractive partner for Mongolia, because both countries share a common concern about Chinese hegemony in the region. Mongolia as a small state needs to ensure that it has an array of international partners that would dissuade Chinese action against its sovereignty (including economic action). On the other hand, a rising India has a vested interest in ensuring that China is not the only regional power courting smaller Asian states.

Ideological Neighbours

India is the world’s largest democracy; Mongolia is the only democracy in its neighbourhood. This connection appears to have been highlighted during the visit, and is certainly a central component in the Indian-Mongolian strategic partnership. During his visit, PM Modi noted that his visit not only coincided with the 60th anniversary of Indian-Mongolian diplomatic relations, but also with Mongolia’s 25th anniversary as a democracy. Both India and Mongolia make a lot of noise about their democratic status. Mongolia has effectively leveraged its democratic credentials to further its relations with the U.S. and E.U. member state; India notes its established democratic system in sharp contrast to regional rivals (Pakistan and China).

 Conclusions

Returning to the question of whether we should expect any radical change in Indian-Mongolian relations, the answer is most likely a resounding “No, but…”

There are clear indications that India and Mongolia are moving to capitalize on the potentially strong relationship that they could enjoy as a result of their spiritual connections, shared geopolitical concerns, and ideological compatibility. There is no reason to expect that India and Mongolia will not be able to forge more significant economic and political ties, if there is the political determination to do so. At the same time, these ties remain limited by geography (distance) and the capabilities of both countries.

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Policy Series: Typical Explanations for Policy Failures (II)

The following explanations are commonly offered to explain these faulty mining policies.

External Factors – In the absence of major international or regional armed conflicts and threats (conventional and non-conventional), politicians often highlight two external factors – the dynamics of the global market and the geopolitical interests of major powers. Understandably, these external factors constrain Mongolian policy-makers – who have limited capacity to deal with them.

 Dynamics of Global Market. In 1990s, Mongolia was, like its two neighbours, desperate for western investors, but few responded because of the unattractive market environment (especially, infrastructure), uncertain political and socio-economic development, and underdeveloped regulatory framework for foreign investors. From a broader perspective, China was not seen as a promising market for natural resources. There also were the economic sanctions following the Tiananmen Square incident. Being overwhelmingly aid-dependent and isolated from the global and regional markets, Mongolian politicians had very little choice except to create the most welcoming regulatory framework for Western investors. They were unable to constrain investments from Chinese small and medium enterprises that were mostly in joint nature. When the potential benefits from the mining activities increased from 2000, Mongolian politicians were overwhelmed with increased interests from foreign investors; resulting in high expectation for resource-based development among politicians. Because of this politicians began to lose their earlier visions of non-mining development strategies (e.g., agriculture, tourism) and the economy became highly dependent on the international commodity prices as well as Chinese buyers. Instead of calculating the commodity market dynamics, politicians are now cover their mining policy failures under the commodity boom and bust cycles. Therefore, the dynamics of the global market is not alone responsible for the mining policy failures. It does offer both a blessing and curse for mining policy making because the reliance on the mining sector and a few mega projects – along with inefficient distributive policies –increases the vulnerability of Mongolia’s economy.

 The Geopolitical Interests of Major Powers. Geopolitical interests also appeared to provide another reasonable external justification for politicians to evade public scrutiny for faulty mining policies. Since Mongolia is a small, weak, and peripheral state, all external actors – two powerful neighbours, distant major powers, their MNCs and SOEs, and IFIs – exercise strong, effective leverage over Mongolia. For the time being these external actors, except Russia on some issues, seem to be tolerant and respective for Mongolia’s domestic policymaking process.

In retrospect, Russia has been quite assertive in certain areas and has explicitly pressured Mongolian politicians to change their policies (Wachman, 2010; Radchenko, 2013).[1] The first is the railroad. For Mongolia, the railroad is the most critical infrastructure for mining. With its partial ownership of the Mongolian railroad, the Russian government is heavily involved in the railroad politics. This is seen by its (1) rejecting the Mongolian government’s attempt to accept the US Millennium Challenge Account funds ($188 million) for the railroad project; (2) advocating the linkage of major mining sites to the trans-Mongolian and trans-Siberian lines; and (3) delaying the linkage of major mining sites in southern Mongolia to the Chinese railroads. Uranium mining is another area. From 2009, Russia re-established its influence in developing uranium deposits in Mongolia by (1) establishing the joint liability company, Dornod Uran; (2) marginalizing the Canada-based Khan Resources Inc; and (3) agreeing to resume full-scale of cooperation with Mongolia in areas of uranium (e.g., education, training, and infrastructure). [2] The last are on and off attempts of Russian state-affiliated oligarchs to be involved in major mining activities (e.g., Tavan Tolgoi and Asgat) and infrastructure projects (e.g., a power plant, railroad). The first two, the railroad development and uranium mining, were explicitly advocated by the Russian state whereas the other issues have been advocated by Russian oligarchs.

In contrast, China has been more tolerant and less assertive in dealing with Mongolia – although it possesses strong leverage over Mongolian policymakers.[3] First, China did not openly retaliate against Mongolia’s inclinations to provide more opportunities for Western companies. This might be understood in the context of Chinese closer economic collaboration with the West. Second, China tolerated Mongolia’s protective measures against Chinese SOEs’ investment into mining, telecommunication, and banking sectors. For instance, Mongolian politicians cancelled the bidding of the Chalco, a state-own aluminum company, to buy the SouthGobi Sands coal mine and approved the Strategic Entities Foreign Investment Law. Third, Chinese companies appear to be accepting the mining policies, despite the unpredictable and unstable nature of these policies, and offering more flexible policies towards Mongolia, especially in the areas of joint development of infrastructure and access into Chinese transit networks and ports. This type of Chinese constructive behavior would certainly create a favorable market and investment environment for mining in Mongolia.[4]

Given these contrasting behaviors of Mongolia’s two neighbours Mongolia has attempted to attract political security and economic interests of the so-called ‘third neighbors’ – distant major and secondary powers, that are expected to support Mongolia’s efforts to maintain its sovereign statehood in a complicated neighborhood.   Mongolia has restructured its macroeconomy with assistance from these states and IFIs, entered into a series of agreements with them to increase trade and investment, and even offered various types of exemptions, ranging from visa to taxation, for these states. With the commodity boom, long-term stability of the Chinese market and Mongolian desires for engaging non-Chinese firms, private companies of third neighbor states appear to have some advantages over Chinese and Russian SOEs. Moreover, the democratic system also provides these multinationals with formal mechanisms to influence domestic policy-making process. As a result, we have witnessed these multinationals exert influence through various channels. This includes advocating government policies (e.g., the United States), IFIs – especially, the WB, IMF, EBRD, influential politicians (e.g., James Baker, Tony Blair), and local partners.

Although all these external actors – all simply pursuing their pure business interests (maximize the gain, minimize the cost) – contribute to competitive political and business environment for Mongolian politicians, none of these actors, except Russia in some areas, have demonstrated explicit manipulation of Mongolian policymakers in developing and implementing the mining policy. Therefore, it is not sufficient to point out external factors – the dynamics of global market and geopolitical interests of major powers – as key explanations for the mining policy failures of Mongolia.

Domestic Factors – Politicians also point to two specific domestic factors for causing the policy failures. One is private business interests, which are expressed by political and business factions and business interest groups. The other is civil society activists, which have been labeled by politicians as “populists” a problematic term in Mongolia.

Private Business Interests. Like any other democracies, including the developed ones, businesses have all possible channels to influence the policy-making process in Mongolia. In order to advance their business interests (i.e., to increase and protect their wealth), businesses always complicate the policy-making process – unless politicians, parties, and bureaucracies create and maintain the predictable and just business environment. This is the most complicated, especially during the transition period and also in a developing state like Mongolia. Starting from the gold rush period (1992) and privatization of state properties, natural resources contributed to the emergence of a new capitalist class. Many mining companies and individuals obtained mining licenses and privatized the state-owned mining enterprises, some jointly with foreign investors. This process was pushed forward by the coal-mining boom and increased foreign mining interests in Mongolia. All businesses wanted to capitalize on these ad-hoc opportunities. Some of them established the mining consortium to operate in the largest coal mine deposit (i.e., Tavan Tolgoi), some entered into a competition to disadvantage each other (e.g., MSC vs. Jenco), others quietly bargained over major mining projects (e.g., MAK) and still others competed for the supply side businesses (e.g., equipment, fuel, food, services and so forth). Today these competitions have became more intensified and are formally and informally institutionalized in Mongolia’s political processes. Just a quick glimpse of the composition of the parliament, cabinet, and political parties demonstrates how much these private business interests are entrenched into the policy-making process. Therefore, this is clearly one of the influential factors for the policy failures, although all other democracies face this influence of business interests.

Civil Society Activists and Movements. Politicians also blame civil society activists and environmental movements for mining policy failures. Like private business interests, politicians, parties, and bureaucracies cannot escape from the pressure of civil society movements. Until the main causes of the public discontent are sufficiently addressed and/or assured with reasonable medium and long term solutions, civil society activists and movements will not decline. In any democracy, the government would expect the public discontent and social mobilization when the government cannot provide important public goods, especially justice. This also applies to the Mongolian case. Since 1990 the civil society space has remained open for civil society activists, organizations, and movements. A few main themes – corruption, injustice, and environmental degradation – have been advocated by these actors. The growth of the mining industry simply intensified the public discontent for three main reasons. First, corruption, revolving around the natural resources, provides much stronger justification for the public discontent than the corruption involving foreign aid. The public is more concerned with the mining issues. This is because (1) the land and natural resources are considered the public, national property; (2) mining activities have the most visual impacts on the environment, society, economy, and politics; (3), especially in the Mongolian case, the public is concerned about non-transparent governmental debts (e.g., borrowing loans and bonds in anticipation of operating large scale mines with foreign investors). Second, the environmental damage, especially from artisanal mining, arouses a stronger sympathy from the public in comparison to other major social issues (World Bank, 2006; Swiss Agency for Development and Cooperation, 2011). Third, major mining investment projects provide an effective leverage for the public to pressure politicians, parties, and bureaucracies since political instability increases the risk for large-mining investment deals. Unlike authoritarian regimes, we would expect similar types of public discontent in other democracies, especially in developed ones, if the mining industry contributes to corruption, injustice, and environmental degradation. Any politicians, parties, and activists would pursue the populist politics for multiple purposes (e.g., morale, political, and rent-seeking). Therefore, like private business interests, civil society activism (plus populist politics) also is considered one of the influential factors for mining policy failures, although it is not the cause.

[1] Mongolia is overly dependent on fuel imports from Russia and transit routes to Europe while Russia maintains a significant percentage (49-51) ownership of Mongolia’s key infrastructure (i.e., railroad), industry (i.e., Erdenet copper plant), and other joint ventures – such as Mongolrostsvetment LLC (the 4th largest fluorspar mining; potential silver mine).

[2] “Uranium in Mongolia,” October 2014, World Nuclear Association, available at www.world-nuclear.org

[3] Mongolia is also dependent on Chinese investment, market, and infrastructure (esp., railways and seaports).

[4] However, these Chinese behaviors have been regarded suspiciously in Mongolia.

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Potential Northeast Asian Economic Corridors: Differing Chinese and Russian Priorities

Sitting at a strategic crossroads between Europe and East Asia, Mongolia and North Korea are potential economic corridors for the wider Eurasian landmass. However, the realization of such corridors depends in large part on Chinese and Russian policy priorities, since both have long-standing geostrategic interests in the region. If the current trend of regional economic development continues to override the traditional security dilemma of all these neighbors, Mongolia can provide the shortest route for China to Russia, while North Korea could facilitate Russia’s outreach to other non-Chinese economies in East Asia. At the same time, Mongolia and North Korea, as the most isolated economies of Northeast Asia, would benefit from Sino-Russian regional development initiatives. Even though Beijing and Moscow have endorsed closer cooperation, they apparently have differing priorities: China advocates the Mongolian economic corridor, whereas Russia prioritizes a corridor through North Korea.

The existence of shared, and sometimes competing, Sino-Russian geostrategic interests in Mongolia and North Korea is historically quite clear. When Russia has perceived threat coming through Mongolia in the past, it extended its political and military presence into this landlocked country. Over 20,000 Soviet soldiers lost their lives defending Mongolia from Japanese aggression in 1939, and the Soviet Union maintained over 100,000 military personnel in Mongolia during the period of Sino-Soviet tensions in the 1960s and 1970s. Presently, while not wanting to provoke China, its newly established strategic partner (see EDM, March 10), Russia now has revived its defense ties with Mongolia by organizing bilateral exercises, providing military hardware, and resuming military training assistance (see EDM, March 20, 2013; October 9, 2013). Similarly, over 150,000 Chinese soldiers and volunteers lost their lives in defense of North Korea in 1953, and China is still committed to the mutual defense aid and cooperation treaty, which was renewed in 2001. Moscow and Beijing continue to emphasize these bonds by attending, at the highest level possible, events commemorating such past joint military endeavors. This clearly indicates that Mongolia and North Korea remain geostrategically significant for Moscow and Beijing. But, economically, China and Russia have differing priorities.

China appears quite supportive of Mongolia’s initiative to become a Eurasian economic corridor, and it quickly included Mongolia in the Silk Road Economic Belt initiative as well as the Asian Infrastructure Development Bank. At a summit in Dushanbe, Chinese President Xi Jinping proposed a Mongolian economic corridor that would increase transit infrastructure and Mongolia’s power grid network (Xinhua News, December 4, 2014). Earlier this year, Chinese Foreign Minister Wang Yi repeated Beijing’s interest in building an economic corridor through Mongolia. He articulated that this corridor would be an organic combination of China’s Belt and Road initiative, Mongolia’s Prairie Road and Russia’s Eurasian Railway initiatives (Chinese Foreign Ministry press release, April 2).

In contrast, China has, to date, excluded the Democratic People’s Republic of Korea (DPRK—North Korea) from both economic belt and infrastructure bank initiatives, even though there were previously such discussions with North Korean officials. This may indicate Beijing’s priorities of bringing Mongolia, Central Asian states, and South Korea closer under the China-centric regional economic order at this time of strategic convenience. Whereas, regarding Pyongyang, Beijing seems to have decided that it would prefer to restrict Chinese-DPRK economic relations to their present level. North Korea currently has quite limited options and must rely on Chinese capital, technology and markets.

Russia, on the other hand, appears to have prioritized the North Korean economic link rather than Mongolia’s economic corridor for several reasons. First, Russia’s engagement with North Korea would provide more opportunities to project Moscow’s image of a “Great Power” in the Asia-Pacific—particularly since Pyongyang considers Moscow a reliable partner in balancing against Beijing as well as other members of the Six Party Talks on North Korea’s denuclearization. In late September 2014, Pyongyang dispatched its foreign minister to Russia to build up a united political front as both countries have come under sanctions from the West (Mid.ru, September 29, 2014; The Guardian, September 30, 2014).

Second, Russia’s investment into North Korea promises a quicker and greater return than its investment into Mongolia, which would provide only an additional route for Russian exports to China. In the case of North Korea, Russia is more interested in gaining access to ice-free ports on the Pacific coast and investing into transit routes for its mineral exports to the wider East Asian region. This would provide access to some of East Asia’s largest resource importers, including South Korea, Japan and Taiwan.

Third, Russia sees more investment opportunities overall in North Korea than Mongolia. This may be especially true considering the strong South Korean interest in linking the trans-Siberian railway with the trans-Korean railways. Indeed, Russia has already expanded its business presence in Pyongyang and started playing a key role in implementing such trilateral projects (see EDM, May 7, 2014).

In contrast, Moscow’s policy toward Mongolia has been largely for Russia to regain its former “privileged status” in areas of major Mongolian mining projects, infrastructure development and energy sectors. But this contradicts shifting political and economic realities in Mongolia, which has been seeking to diversify its global economic and investment partnerships (see EDM, February 20, March 2, April 6). Therefore, most emerging projects like new railroads, uranium mining and energy, where Russia and its state-affiliated business entrepreneurs expressed an interest, have become victims of local politics.

While concerned with their traditional geostrategic interests, China and Russia are pursuing different policy priorities for establishment economic corridors in peripheral states. China is more interested in funding infrastructure development projects in Mongolia, whereas Russia prioritizes North Korean economic links and economic opportunities. Despite the entirely different political systems in Ulaanbaatar and Pyongyang, both present risk and uncertainty for long-term investment projects—even when amicable Sino-Russian interactions create a favorable momentum for closer economic cooperation.

Note: re-posted with the permission of the Eurasia Daily Monitor of the Jamestown Foundation, for the original news, EDM (2015/05/08).

Posted in China, Economics, Infrastructure, International Relations, Japan, Mongolia and ..., North Korea, Russia, South Korea | Tagged | Leave a comment

New to Ulaanbaatar in 2015

I’ve been keeping a list of things that are arriving to/disappearing from central Ulaanbaatar: May 2014October 2013.

I’ve copied the 2014 list here and am adding to it. New items since 2014 that I’m adding in italics.

What has arrived?

  • sadly, Louis Vuitton, KFC, Burberry Kids and Ugg [probably not new, but I noticed these brands]
  • Mini, Bentley
  • child seats
  • sidewalks
  • parks
  • farmers’ markets
  • yoga
  • dogs on leashes
  • Sunday morning joggers and bikers
  • coffee culture
  • river walkway along the Dund River (under construction in May 2015 but looking very promising)

    • pedestrian overpass to avoid street traffic (Chinggis Ave, just south of Peace Bridge)

  What’s going on in #Ulaanbaatar? Pedestrian overpasses? A bicyclist? What?   A photo posted by Julian Dierkes (@jbdierkes) on

What has disappeared, or at least nearly?

  • stationary 80s-office-phone-looking old-granny cell phone booth
  • for-pay scales (actually, they seem to be hanging on)
  • free WiFi on Sukhbaatar, er Chinggis Khaan, er, Sukhbaatar Square
  • Sukhbaatar Square, er, Chinggis Khaan Square
  • open gullys/missing manholes
  • street kids
  • packs of dogs
  • smoking
  • the sixth-floor souvenir shop at the State Department Store (though perhaps seasonal)
  • oversized sunglasses for women that were so popular across Asia (?) some years ago
  • Nescafe (see above on coffee culture)

What will appear in the future

  • navigation systems
  • wheelchair accessibility
  • bike lanes
  • city park along the Tuul (see above!)
  • new airport (apparently)
  • subway (really, I wish they had selected light rail instead)
  • sports cars √
  • Harley-Davidson
  • urban renewal and historical restorations embracing district north of government house (National University of Mongolia, German embassy, etc.)
  • road signs in the countryside
  • street names and signs in the city
  • network of cross-country riding trails
  • parking (meters)
  • Combined Heat and Power Plant #5 (yeah, right!)
  • hipsters discovering УАЗ (minivan and jeep)

What will disappear in the near future

I’m going out on a predictive limb here… 2-3 years is what I mean by “near future”.

  • stray dogs
  • stretched-out hand to signal for a car ride
  • that awkward extra half-step on most stairs

What will disappear in the medium-term future

I mean around 7 years or so.

  • new (to Mongolia) cars that are right-hand drive
  • the neo-classical Ministry of Foreign Affairs building, with its Stalinist (if that’s an architectural style) spire
  • deels in the city
  • some of the downtown university campuses
  • buildings of 4 floors or less in the urban core
  • Russian minivans (УАЗ452) but see above.
Posted in Curios, Ulaanbaatar | Tagged | 2 Comments

FOC Comes to Mongolia

Thanks to support from the Canadian Department of Foreign Affairs, Trade and Development, I was able to participate in the Freedom Online Coalition conference in Ulaanbaatar.

Below, I want to highlight some of the discussions and presentations that were of particular relevance to Mongolia.

For a more general sense of discussions at the conference, see #FOC15 on Twitter, or a write-up in the UB Post, or a blogged recap. To my disappointment, the conference seems not to have been covered by any international journalists at all.

Opening

The conference was hosted at Government House, always a grand, but also quite functional venue.

As would befit this kind of international gathering, the conference was opened by a brief greeting by H.E. L Purevsuren, foreign minister.

Naturally, FM Purevsuren also mentioned that Mongolia is celebrating 25 years of democracy this year. H.E. Ts Elbegdorj, president of Mongolia, spoke next. Jargal de Facto’s Jargal D served as the MC.

Kindly, Pres. Elebgdorj, identified this conference as the most exciting conference he has opened.

His address was surprisingly long, substantive and sincere, at least to me.

Some of the themes he touched on included the rapid transformation of Mongolia, drawing particularly on his herder origins and reminiscing about the role of “communications” in the countryside during the state socialist era (ie ride on horseback to fetch a doctor and better bring a horse for him/her). Changes that he identified in Mongolia included the telecommunications revolution, but also democracy and relative prosperity.

At one point, he pulled out a pretty classic “brick” cell phone to illustrate that telecommunications had also developed rapidly and massively.

Pres. Elbegdorj also spoke about the Freedom Online Coalition agenda (summed up in my understanding by something like “ensuring that off-line human rights are also enforced/respected/implemented online”).

After proclaiming online freedom a human right, he compared attempts by government to control the internet to “global warming”, noting also that “democracy is a learning process” and that “people have a right to be suspicious”.

While Pres Elebgdorj didn’t refer to Ts. Bat by name, it seemed to me that he had #FreeBat in mind when he talked about recent challenges to online freedom in Mongolia.

Online Freedom in Mongolia

I had organized a panel that would focus on a discussion of the threat that defamation lawsuits might pose to journalists and the extent to which this threat might lead to self-censorship.

With Trevor Kennedy, Melanie Schweiger and Christina Toeppel, we discussed the personal liability of journalists in traditional media, online, and for citizen journalists across FOC member countries, but also in China, India, Russia, and Thailand as particularly significant examples. Libel or defamation appears in the penal and civic codes of many countries, including FOC members. There is a concerted effort to move these provisions to the civic code, but that has not happened everywhere. The question of personal liability is one that is often highlighted in reporting about the state of media in Mongolia, for example (which led us to this topic in the first place), and it is taken into account by the various indices, but there are several high-ranked countries that have personal liability, Australia being a prominent example. As a general pattern among the FOC members, however, countries that are ranked highly on freedom-of-the-press indices tend not to have personal liability provisions on the book.

The other general pattern we saw is that Asian FOC members (Japan, Maldives, Mongolia), but also the other Asian countries we included in our survey (China, India, Thailand) all have personal liability provisions that threaten journalists financially and otherwise. Given that this was the first FOC conference held in the Asia-Pacific region and that some voices in the plenary session called for an expansion of the membership, particularly in underrepresented regions (anywhere but Europe and North America), we thought that this was noteworthy.

Lhagva who has been involved in efforts to set up the Media Council of Mongolia, joined the session to talk about media policy in Mongolia. #FreeBat was a touchstone in this discussion, but of course that hasn’t been the only case in Mongolia. Last year’s attempt to ban a set of “swear words” was another example, as has been the lack of enforcement of some press-related laws. Lhagva expressed his surprise that Mongolia ranks fairly high in various indices of democracy and freedom of the press.

Our session was also included in live-blogging by GoGo News Agency. After we concluded the session, we experimented with a wrap-up that was broadcast on Periscope, Twitter’s video-broadcasting service. It appears that there were some viewers, but we later could not retrieve the recorded version which only lasts 24hrs on Periscope in any case. My inability to name the broadcast something sensible (other than “Untitled”) probably didn’t increase the viewership, though the app claimed that 61 viewers watched us live.

In a panel on the second day, research organized by the Silk Road Foundation focused on the legal environment for online free speech.

Several presentations were quite useful in listing the laws and governmental authorities that are involved in regulating free speech, but it was also clear from the comments at the end of these presentations, that there is a fair bit of frustration in this community about the lack of responsiveness of the government/parliament to continued arguments for changes in the law, and to the mismatch between Mongolia’s international commitments and the laws and regulations that govern online communications. Activist Kh Nomingerel was particularly vocal in this regard in her presentation on “The Legal Framework of Freedom of Expression on the Internet”.

Cover Mongolia‘s Mogi also participated in the panel discussion. Rather than focus on the more abstract legal aspects, he pointed to the specific implementation of some of these laws as they limit online freedom. He urged listeners to have a look at the Black List of domain names that are blocked in Mongolia, as well as to inform themselves about the FinFisher mention on WikiLeaks.

Significance of FOC Conference in Mongolia

In addition to the topic of online freedom that I arrived at through my interest in digital diplomacy, I was very interested in the FOC conference as a foreign policy tool. Here, the hosting of the conference surely was a success. By being selected and then acting as the host, Mongolia reaffirmed its claim to membership in the club of democracies. Some of its “third neighbours” are quite active and were well-represented at the conference, especially Canada and the United States with delegations from Ottawa and Washington participating respectively. Japanese participation was more limited, and Australia just joined the FOC.

Whether or not the calls for alignment between claims to human rights online and democracy, and the actual implementation of internet-related laws detract from the overall hosting of the conference is hard to say, but since most of the “FOC-crowd” is unlikely to have sustained interactions with Mongolia, I suspect that the symbolic impact will far outweigh any doubts visitors might have had about sincerity. 

Of course, even the symbolic impact will be somewhat limited, as not a single foreign journalist covered the conference and beyond some blogs, little notice has been taken of the event.

The domestic press covered the conference extensively. Here, I suspect the impact is more one of the satisfaction at being a viable member in a club of advanced democracies than the attention given to some of the shortcomings in Mongolia’s regulations.

Posted in International Relations, Media and Press, Mongolia and ..., Protest, Social Change, Social Issues, Social Media | Tagged | 2 Comments

Initial Observations in Ulaanbaatar, Again

On previous visits to Mongolia, I’ve taken notes on my initial quick observations about changes (and the lack thereof) in the Ulaanbaatar cityscape: November 2014May 2014 | November 2013.

So, here it goes for May 2015.

Travelling to ULN

I came via Seoul. That is such a more pleasant way to come than the transfer in PEK. Incheon is a really nice, bright, modern airport. International transit is well-organized with a simple detour through security ahead of passport control so that Korean immigration is not involved at all. The only thing that it is missing are better newsstands with international newspapers and magazines.

Flying KAL is also much more pleasant than the Air China flight from PEK. The flight leaves from a reasonably-located gate, not the last gate at the end of the furthest reach of the terminal that PEK always seems to assign to ULN flights. It’s really hard to fight the sense of a imperial Chinese attitude toward Mongolia during the PEK transfer and the gate assignment is part of that. Other elements: the CA flight is always the oldest plane in their fleet, last night was a modern, very pleasant plane. KAL hires Mongolians as flight attendants, so all on-board announcements are made in Korean, English, and Mongolian. Even though you would think it would be easier for CA to find Mongolian-speaking Chinese flight attendants (even if it is Inner Mongolian) than KAL, I’ve never heard a word of Mongolian on CA flights, nor any attempts by their staff to cater to the many Mongolians that travel with them. I also took note that the flight arrived precisely on time, despite the usual sidewind/turbulence at ULN.

I arrived at ULN late at night which always reminds me of my first trip in 2004 (I think, and not counting a 1992 Transsiberian stop). It’s always slightly surreal, too, to drive into Ulaanbaatar from the airport at night.

Khaan-Uul District

It’s really amazing to see how the whole stretch of Ulaanbaatar between ULN and the bridge over the Tuul has developed.

One of the curiosities that struck me last night is that most of this area doesn’t have a lot of gers in it.

There’s probably an easy/obvious answer to why that would be (please, let me know in comments!), but it is striking. Yes, the area is relatively far away from the centre of Ulaanbaatar, but so is much of the Western end of Songinokhairkhan and there is lots of ger sprawl there. Something about being on the North side of the mountains, so in the shade? Something about the airport or about the Naadam horse racing course?

Of the various directions out from central Ulaanbaatar, this is one of the areas that is developing mostly by contemporary construction, not by people “voting with their ger” to move here. Thus there are lots of tall buildings sprouting up including the International School, etc.

Some new (to me) developments I noticed last night:

  • are the streetlights blinking on-and-off in a coordinated way? Is that a desired discotheque-effect (though it seems of limited benefit to drivers/pedestrians)? Or (more likely, I think), is this faulty wiring?
  • when there are traffic lights in the middle of an otherwise deserted stretch of road to allow pedestrians to cross to busstops, that’s a great thing. When those lights aren’t button-activated but on a timer and thus give pedestrians a green light in the middle of the night when there don’t seem to be any pedestrians, that frustrates drivers, and few will stop.
  • there’s a brand-new, very nice-looking Sansar supermarket on the North side of the airport road now.
  • the Hunnu Mall was still dark last night and it didn’t look like it was close to opening, or at least not closer than it looked late last year.

Coming into Central Ulaanbaatar

That whole section from the Tuul bridge to Peace Bridge looks so different now.

One part that is particularly striking is what used to be the traffic circle near the Olympic building

Here’s my immediate impression I tweeted last night:

Given my past (and hopefully future) involvement with the National Olympic Committee, I’m a bit dismayed by this loss of prominence.

I also noted that the Shangri-La is still dark and unfinished.

The apparent lack of city planning is continuing to produce strange concoctions of structures and streets in weird configurations.

On the Street

Speaking of street lamps (see above): I did notice that a number of the street lamps in central Ulaanbaatar seem to be LED lights. I haven’t noticed even one of those in Canada, so if my amateur observation is right at all, a case of leapfrogging technology.

I continue to be fascinated by the varieties of cars that show up on Ulaanbaatar streets.

When I was a kid, the car that would have been voted least likely to be adorned with flame stickers or a wing of any kind, might have been the Volvo Station Wagon, car of choice for all academics and other nerds. Well, today, the Toyota Prius might win that particular vote at least until you see versions of Priuses on Ulaanbaatar streets. Not only do some body panels seem to have a tendency to rip, but they also seem to get the tinted-window and fancy hubcaps treatment with the same frequency as all other cars. Note to self: check whether PIMPmyPRIUS.mn is still available as a domain name…

Posted in Social Change, Ulaanbaatar | Tagged | 6 Comments

Outlook: Freedom Online Coalition Conference in Ulaanbaatar

[For my impressions from the Conference, see http://blogs.ubc.ca/mongolia/2015/freedom-online-coalition-mongolia/]

Next week (May 4-5) the Mongolian government hosts the annual conference of the Freedom Online Coalition, a club of 26 countries dedicated to the promotion of, er, freedom online.

This is yet another success in Mongolia’s foreign policy, leveraging its status as Asia’s only post-state-socialist democracy to engage “third neighbours” and specifically to forge closer ties with tele-neighbourly democracies. Note, for example, that Mongolia’s immediate neighbours, Russia and China, are unlikely to be seen anywhere near the notion of freedom online.

Previous examples of events/organizations that help Mongolia remain on the radar screen of powerful large democracies: Community of Democracies 2013,, OSCE, next year’s Asia Europe Meeting.

Freedom Online Ulaanbaatar

Motto: “Internet Policy Making – Best Practices for Promoting Online Freedom

You can see how my interest in Digital Diplomacy coupled with my focus on Mongolia mean that I was eager to participate in this conference.

I feel quite fortunate that our proposal for a panel at the conference was accepted and am looking forward to participate in the conference together with UBC MAAPPS students Trevor Kennedy, Melanie Schweiger, and Christina Toepell. Our participation is possible through the financial support of the Canadian Department of Foreign Affairs, Trade and Development.

If you’re curious about other sessions for the conference, please see the detailed program.

Here’s our plan for our panel:

May 4, 14:15-15:30h
“Journalists’ Liability Online and the Role of the Press”

Panelists:

Debates and opportunities to critically examine and discuss government policies are an essential feature of democracy. Cross-national evaluations of press freedom such as the Freedom House “Freedom of the Press” report try to measure legal protections for journalists’ contributions to such debates.  In many countries, publishers are regulated as the legally liable entity regarding comments made by employees of these publishers. But in several countries across Asia, journalists are personally liable in libel accusations. In the last two years this liability seems to have been extended from traditional media to the online space, for example in societies with extensive state censorship of the media like China and Thailand, but also in FOC members like Mongolia.

While this seems merely an extension of practice from traditional media to social media, the threat of libel lawsuits may well curtail independent reporting, especially in countries where electronic media are a vibrant sector and essential part of public debates.  

The proposed panel will compare and contrast practices regarding the role of publishers in shielding journalists across different countries with contributions from scholars, analysts and journalists themselves.

The idea for this panel was rooted in a discussion at Freedom House late last year where SE Asia analysts pointed to the arrival of laws extending the personal liability of journalists to the online space starting with Thailand but the spreading to other SE Asian countries. Given my interest in Mongolia, this meshed with my in-passing knowledge of the prosecution of Ts. Bat for critical remarks he had made about then-Minister of Transport A Gansukh, see also #FreeBat. The personal liability of journalists has long been cited as an obstacle to the development of the media in Mongolia leading to self-censorship and a lack of investigative and critical journalism that is so needed to evaluate proposed policies.

The other angle on this topic is that a vibrant press is clearly seen as an essential element in democratization as the media can serve a critical role as the “Fourth Estate”.

As we will discuss in the panel, even among FOC member countries there is a fair degree of variability in the extent to which journalists’ writing is protected in traditional media as well as online.

I hope that there will be some discussion of these issues at the panel as well and that there will be lively discussion online using #FOC15.

I even have delusions of a self-made mini press conference using Periscope, but we’ll see if that happens. If you’re curious about that, please follow me at @jdierkes

Posted in Canada, Civil Society, Foreign Policy, International Relations, Law, Media and Press, Mongolia and ..., Social Media | Tagged | Leave a comment

Policy Series: Mining Policy Failures (I)

Mining policy is a good entry point to understand the overall policy-making processes of Mongolia. For one, mining has been one of the dominant economic sectors of Mongolia since the early 1900s.[1] Second, with extensive mining activities, mining has caused numerous political and socio-economic challenges for policy-makers. Today any policy decisions related to mining trigger diverse reactions from political parties, political-business factions, businesses, civil society activists, and citizens. Third, mining policies also have implications for global stakeholders such as IFIs, multinational corporations (MNCs), state-owned enterprises (SOEs), foreign governments, and transnational advocacy networks (TANs). Finally, mining requires policies with long-term consequences not only to ensure foreign and domestic investors business rights and property rights are protected, but also to assure citizens limit negative mining impacts on politics, economy, society and environment are prevented. For these reasons, the study of mining policy and its failures is useful to illuminate ways to manage the central challenge of democratic governance – how to promote long-term policy solutions in the face of short-termism (fractionalized, parochial interests) dominated politics. In other words, mining policy failures in Mongolia will highlight a key feature of democratic politics: politicians, who are on an electoral schedule are inclined to neglect the long-term consequences of their policies and only be interested in remaining in office at any cost.

The following examples illustrate the less successful policy-making processes in Mongolia. They are policy failures for a few reasons: (1) their negative consequences are still present; (2) both politicians and the public acknowledge them as failed policies; (3) succeeding parliaments and cabinets have not taken any long-term policies to mitigate their negative impacts; and (4) politicians and bureaucracies still introduce similar policies that would certainly repeat these failures.

The Gold Program [Алт хөтөлбөр] was introduced in 1992 to attract foreign and domestic investors and to alleviate the immense socio-economic challenges resulting from the economic transition of the early 1990s. Even though the program provided opportunities for domestic mining companies and the government to generate some revenues, the program brought many challenges. First, mining companies exploited the weak regulatory and institutional settings and the majority of miners did not properly close and/or reclaim their mining sites. Second, related to the first, it provided opportunities for the emergence of a Mongolian-type of ‘gold rush’ – the ninja miners – people who engage in artisanal mining activities at abandoned mining sites.   Although the studies present different numbers, over 60 thousand people engage in artisanal mining activities and live within the informal (illegal) socio-economic structures of the artisanal mining. (Swiss Agency for Development and Cooperation, 2011, pp. 23-27; Grayson, 2004) Third, the negative environmental and socio-economic impacts of these small and medium-sized mining companies and artisanal miners are the most devastating to local community, environment, and herding livelihood (Swiss Agency for Development and Cooperation, 2011; World Bank, 2006). Although a few attempts were initiated, they did not succeed because of sudden policy changes.

Nalaikh Coal Mine [Налайхын уурхай] is a thermal coal mine partially closed following a deadly explosion in 1990. From 1954-1980, a Soviet-style mining town was built in Nalaikh to provide high-quality coal for the Soviet military facility (i.e., the largest joint military airbase, engineering and air defense units), power plants of the capital city as well as ger districts in the greater capital city area. At that time, the mine had state-of-art facilities and followed the Soviet mining standards for environmental and labor safety.[2] The withdrawal of Soviet military forces and suspension of Soviet assistance contributed to the overall deterioration of the operation and maintenance of the Nalaikh mine. Because of economic devastation in 1990, the government partially closed the mine, but it could not fully restrict artisanal mining activities in underground shafts of mostly unemployed miners and their families. Today over 1500 people mine with the lowest safety requirements. Since its partial closure, on average 10-17 people die annually in Nalaikh mines.[3] Despite periodic talk about the negative impacts of artisanal mining in Nalaikh, no government attempted to enforce the mining law, standards, and regulations or to provide a long-term policy solution even though it is the closest mine to the capital city.

Oyu Tolgoi [Оюу толгой] – was the first-ever and largest mining deal with multinational mining corporations (Jackson, 2014). After eight years of its discovery by the Canadian Ivanhoe Mines, the Mongolian government concluded the investment and shareholders’ agreement with the Ivanhoe Mines and Rio Tinto in October 2009. Under the agreement, the Mongolian government obtained 34 percent ownership and the Turquoise Hill Resources (a name of joint mine of Rio Tinto and Ivanhoe Mines) 66 percent, with foreign investors agreeing to provide local employment, procurement, and to contribute to infrastructure development for the value-added production (e.g., copper smelter, power plant, rails, and roads). Even though this phase I (i.e., open pit mine) of the mine was completed in June 2013, the Mongolian government and Rio Tinto failed to reach agreement on the project costs, including its phase II (i.e., the underground block-cave mine). This disagreement caused both sides to take retaliatory measures against each other (e.g., unpaid tax claims by the Mongolian government and trimming Mongolian employees and some local procurement by the investors) while slowing the overall project development, sending negative signals for foreign, especially Western investors, and heating up domestic politics. Now many policy questions – how to deal with powerful, global investors over the ownership, management, and development of the large-scale projects and how to assure the public about long-term environmental and socio-economic challenges – remain unanswered. The most interesting fact is why politicians, most of whom were members of the 2004 and 2008 parliaments which approved the investment agreement, now have been attempting to change their policy choices.

Tavan Tolgoi [Таван толгой] is the largest coal deposit in southern Mongolia. Since 2008, Mongolian politicians, bureaucrats, and private businesses as well as foreign investors have hoped to generate quick, substantial revenue from the Tavan Tolgoi deposit for two reasons. First, it will be closer to Chinese and East Asian markets if the railroad to the Chinese border is built (247 km). Second, unlike the Oyu Tolgoi mine, the deposits are extractable with open-pit mining technology. Therefore, all stakeholders have been extensively competing over licenses for mining operations and development of infrastructure, especially the railroad. In 2010, following the recommendation of the National Security Council (NSC), the parliament directed the government of Prime Minister S Batbold to negotiate with potential foreign investors to operate the western section of the mine. A year later, the government announced its decision to divide the operating licenses for Chinese Shenghua Group (40%), Russian-Mongolian consortium (36%), and American Peabody Energy Corporation (24%). However this decision was recalled immediately due to concerns from Japanese and Korean bidders. At the same time, the government permitted the state-owned Erdenes Tavan Tolgoi to operate the eastern section of the mine with domestic and foreign mining companies. Then contracts of the Erdenes TT were revoked and re-negotiated by the governments of ex-Prime Minister Altankhuyag and incumbent Saikhanbileg. In August 2014, the government issued another resolution to finalize the bidding over the operation of the Tavan Tolgoi mine.

The Strategic Entities Foreign Investment Law was passed by the parliament in May 2012 and invalidated in October 2013 with the passage of the new Investment Law. In April 2012,the Chinese state-owned Aluminum Corp of China Ltd (Chalco) launched a bid to buy the stakes of Ovoot Tolgoi, a Mongolian coalmine, from the South Gobi Resources Ltd (SGQ). Since the deal was done without informing the Mongolian government, politicians and the public began to voice concerns about the country’s sovereignty. A month later, the parliament passed the ‘Strategic Entities Foreign Investment Law,’ which requires foreign state-owned and private investors to obtain the parliamentary and governmental (cabinet) approval to operate in sectors of strategic importance (i.e., terrestrial resources, banking and finance, and media and communications).[4] Just like the quick passage of the law within a month, it was amended in April 2013, and repealed in October 2013 with little study and justifications.

The Windfall Profit Tax Law was passed in 2006 and repealed in 2011. The law imposed a 68 percent tax on copper and gold concentrates. In accordance with this law, mining companies operating in Mongolia would pay 68 percent tariffs on copper and gold concentrates if the price of copper and gold exceed $2,600 per metric ton and $500 per troy ounce respectively on the London Metal Exchange.[5] The threshold for gold was raised to $850 in 2008. Although the initial draft included only copper, gold was added later because of pressures from civil society movements. Interestingly, this law was secretly passed through a quick legislative process without proper consultation with major stakeholders – the copper and gold mining companies. By imposing the windfall profit tax, politicians intended to generate revenues to implement their election campaign promises (e.g., cash transfers), to assuage concerns of environmental and civil society movements concerning irresponsible mining, and to pressure the Oyu Tolgoi mine to build smelter facilities in Mongolia.  The Windfall Profit Tax Law produced several unintended consequences. First, it faced strong opposition from the mining communities; many sought ways to evade taxation (mostly due to poorly institutionalized enforcement) and the scale of the artisanal mining increased. Second, the only implementer of the law became the Mongolian-Russian joint copper venture, Erdenet, which then needed to generate additional revenue for the state beyond its operational capacity. Third, it projected the image of an unstable regulatory environment for major foreign investors.

The Law on Prohibition of Minerals Exploration and Mining Activities in Areas in the Headwaters Rivers, Protected Water Reservoir Zones and Forested Areas (known as The Law with the Long Name [Урт нэртэй хууль]) – was passed by the parliament in July 2009 under pressure from civil society organizations and the environmental movement.[6] Since the implementation of the aforementioned Gold Program, environmental damage, especially to rivers and forests, had grown noticeably and disrupted the livelihood of herding families and agrarian communities. The law caused strong opposition from the mining companies while bringing staunch support from civil society and the public. However the implementation process became difficult for two reasons. First, the law stopped all types of exploratory and extraction activities of mining companies near water sources, river basins, and forests. As a result, the government has been mandated to reimburse costs of all these mining companies. Second, the law still lacks effective enforcement mechanisms for artisanal miners, whose operations are not regulated under any mining and environmental legislation. Although civil society and environmental movements succeeded in pressuring politicians to regulate irresponsible mining activities, politicians failed to produce a well-thought, phased, and effective policy that considered the demands of all stakeholders, namely civil society organizations, mining companies, and local community.

These are a few examples of failed mining policies in Mongolia. Although politicians, parties, and bureaucracies have been attempting to improve the regulatory framework for mining activities, these laws, regulations, and standards are destined to be “momentary policies” due to the bargaining dynamics of major stakeholders – domestic and foreign investors, mining lobbies, mining companies, and IFIs on one side and civil society actors made up of domestic and international networks, environmental movements, and local community on the other side. Between these two forces, politicians, parties, and bureaucracies could not envision and enforce long-term mining policies.

[1] The mining sector of Mongolia has evolved through different historical stages: mostly Chinese dominated artisanal mining period (up to 1925), when Western companies were conducting small-scale exploration and extraction activities; the socialist period (1925-1989), when the Soviet Union and other communist bloc states (esp., Czechoslovakia, Bulgaria, Germany) had assisted establishing a large and medium scale mines and conducting geological surveys; the post-communist period (from 1990 onwards), when Mongolia has been using its mineral resources to attract foreign and domestic investors.

[2] Mining administration, mining rescue unit, recreational facilities, railroad, and mining vocational training college.

[3]For more information on Nalaikh mine, see http://mining.time.mn/content/26292.shtml; www.eurasianet.org/node/63373; www.ibtimes.com/most-dangerous-coal-mine-world-mongolias-illegal-nalaikh-pits-1564916; ubpost.mongolnews.mn/?p=10802

[4] The Strategic Entities Foreign Investment Law (2012) available at: www.legalinfo.mn.

[5] The 68 percentages was taken not because of the careful calculation, but of the commemoration of the Mongolian sumo records.

[6] The law was published in the State News (Төрийн мэдээлэл) 2009, No. 28. In 2011, the Head of the Mineral Resources Authority acknowledged the law was an important step towards responsible mining, but its implementation process was not clearly articulated. “The Law with the Long Name is a Good Legislation,” [“Урт нэртэй” хууль бол сайн хууль] 27 April 2011, http://economy.news.mn/content/64451.shtml; the civil-society compiled information on the Law with the Long Name is available at transrivers.org.

Posted in Governance, Mining, Mining, Oyu Tolgoi, Policy, Policy, Policy Series | Tagged | 2 Comments

Guest Post: Assessing Khan Resources Arbitration

Matthew Levine

Following expropriation of Dornod uranium investment, Khan Resources announces conclusion of arbitration with Mongolian government

Intro

Khan, a mining company listed on the Toronto Stock Exchange’s venture board, its holding company, and its erstwhile joint-venture partner, recently announced victory in arbitration with Mongolia. Khan has apparently been awarded a base amount of US$80 million plus interest as compensation for Mongolia’s expropriation of its investment in the Dornod uranium deposit.

There is still a great deal about the arbitration that remains unknown: the information in Khan’s press release provides an outline while leaving the details blank, and the award itself has not yet been made public. Non-lawyer colleagues likely have questions about Khan’s apparent victory. Some of these questions – for instance, on what legal basis was the expropriated investment valued  – will only be answered once the award is made public. Other questions though, about for instance the basis for arbitration between Khan and Mongolia as well as the arbitration’s procedure, can be answered based on past experience with investor-state arbitration.

Background

Readers of this blog may be aware that Khan began investing in the Dornod project in the mid 1990s as Ulaanbaatar was undergoing post-Soviet reforms. And that, after some years Khan released a feasibility study in 2009 showing commercial viability, which prompted a takeover bid from China National Nuclear Corporation in February 2010. Subsequently, to simplify a complicated chain of events, the Mongolian government expropriated a majority interest in Dornod without compensation, suspending and then cancelling Khan’s mining licenses.

Readers may also be aware that Canada and Mongolia have started negotiating a Foreign Investment Promotion and Protection Agreement (FIPA). FIPAs like other International Investment Agreements (IIAs) contain both substantive obligations – standards of treatment – and dispute settlement provisions that aim to protect foreign investors from discriminatory or otherwise expropriatory conduct by the host state. In the case of Khan, this would have potentially meant an obligation for Mongolia to pay compensation and access to international tribunal with Mongolia whereby Khan could enforce the compensation obligation judicially. However, while negotiations towards a FIPA started in 2009, progress appears to have stalled and there is to date no treaty.

Arbitration agreement(s)

Given the lack of a FIPA between Canada and Mongolia, it only makes sense to question the basis on which Khan filed for arbitration. A complete answer will have to wait for the award, but some details emerge from Khan’s 10 January 2011 Notice of Arbitration (Notice). In the Notice, Khan cites a series of legal instruments as the basis for arbitration with Mongolia, i.e.: the Energy Charter Treaty, the Mongolian Foreign Investment Law, the CAUC Founding Agreement, and the UNCITRAL Arbitration Rules.

The key point to understand here is that each part of Khan’s ‘corporate family’ or ‘corporate structure’ relied on different instruments to bring arbitration against Mongolia. For example, Khan’s offshore holding company – Khan Resources BV – was able to rely on the Energy Charter Treaty. (The Energy Charter Treaty, or ECT, was one of the most ambitious agreements arising from the collapse of European communism. Among other objectives, it aimed to bring western European capital to oil-rich former-Soviet spaces through the inclusion of an IIA. Mongolia is a signatory to the ECT as is the Netherlands.) Khan Resources BV as a company incorporated in the Netherlands is an investor for the purposes of the ECT and was thus able to claim its protections, including arbitration, against Mongolia.

Dutch holding companies such as Khan Resources BV are routinely used for tax planning but sophisticated solicitors are recognizing that the ECT – not to mention the Netherlands extensive network of bilateral IIAs – provides for investment protection advantages as well. The result is referred to as ‘treaty structuring’ by sympathetic observers and as ‘treaty shopping’ by critics.

The Mongolian Foreign Investment Law is also noteworthy. Khan’s Notice refers to Article 25 as providing that “the settlement of disputes may be resolved pursuant to the provisions of ‘international treaties to which Mongolia is a party or by any contract between the parties’”. The Notice concludes that this provides an “additional basis of consent” beyond the ECT. Mongolia undertook major revisions to this statute, which also dates to the post-Soviet period, in 2013.

Arbitration Procedure

I have been asked whether the arbitration’s procedure was impacted by the fact that the Canada – Mongolia FIPA has not been concluded. One useful way of approaching this question is to note the fourth legal instrument relied on in Khan’s Notice, i.e. the UNCITRAL Arbitration Rules. The United Nations Commission on International Trade Law (commonly referred to as UNCITRAL) first adopted arbitration rules in 1976. A major revision exercise was completed in 2010. Canada’s FIPAs always include the option of using the UNCITRAL Arbitration Rules.

The UNCITRAL Arbitration Rules are today one of the two leading sets of procedural rules for investor-state arbitrations. The other being the arbitration rules of the International Centre for the Settlement of Investment Disputes (ICSID), which is a branch of the World Bank. There are a range of differences between ICSID and UNCITRAL procedure, but it cannot be said that one or other systematically advantages claimants as opposed to defendants, or investors as opposed to governments.

Conclusion

I hope that this albeit short blog post helps non-specialists to better understand Khan’s investor-state arbitration claim against Mongolia. As we have seen, Khan relied on multiple arbitration agreements and each member of Khan’s corporate family was involved in ‘treaty structuring’. Also, the procedure of the arbitration took place according to the UNCITRAL Arbitration Rules rather than the arbitration rules of ICSID. These developments fit the pattern found in many other cases where a developing country government expropriates a lucrative natural resource investment. According to the World Bank, for instance, more than one third of ICSID arbitrations initiated in 2014 involved oil, gas, or mining investments.

Exxon-Mobil’s claim against Venezuela for expropriation of two major assets is a relatively well known case featuring facts not dissimilar to the Dornod expropriation. First off, Exxon-Mobil’s claim was brought by five parts of Exxon’s corporate structure including an offshore holding company and various local operating companies. Although the arbitration was not brought under the Energy Charter Treaty, it again involved the Netherlands and took place under an IIA between the Netherlands & Venezuela. The arbitration used the ICSID Arbitration Rules. As it happens, I have prepared a somewhat more detailed summary that can be accessed here, http://www.iisd.org/itn/2015/02/19/awards-and-decisions-18/.

In addition to treaty shopping and the choice of ICSID over UNCITRAL procedure, the Exxon-Mobil award sheds light on how arbitration tribunals approach the valuation of expropriated assets. On the one hand, the tribunal used a discounted cash flow analysis (DCF) for one of the two assets on the basis that it was already at the production stage. On the other hand, the second asset was not yet at the production stage and the tribunal found it more appropriate to consider the claimants’ sunk investment, rather than DCF.

As mentioned already in this blog post, we do not know the details of how the Khan tribunal approached valuation but we do know that it would have considered Khan’s contractual as well as treaty rights. This is a key difference with the Exxon-Mobil case. (Another key difference is that the Dornod project had not advanced to production.) The award will ultimately reveal the exact legal basis on which the tribunal decided to rely on previous offers for the Dornod project in setting damages.

About Matthew Levine

Matthew Levine is a Canadian lawyer and a fellow at the University of Toronto, Faculty of Law. Matthew began his legal career as an articled student and associate with the International Trade and Arbitration group of a national firm. His practice with mining companies and entrepreneurs includes corporate, securities, and tax law advice as well as arbitration-related work. His international experience includes stints in Geneva and Singapore. Matthew is a graduate of the University of British Columbia (JD, MA) and McGill University (BA).

[Slightly revised on May 15, 2015]

Posted in Business, Canada, Foreign Investment, International Agreements, International Relations | 1 Comment

Guest Post: Mongols on the International Film Stage

Marissa Smith

Mongols on the International Film Stage: Negotiating the International Relations of Mongolia By Means of Their Understanding by Others

During a press conference in Berlin March 3rd with Chancellor Merkel, President Elbegdorj quipped, “Die Mongolen sind wieder da, aber mit friedlichen Absichten!” (The Mongols are back, but with friendly intentions!”) In meetings coinciding with the International Tourism Fair (ITB) in Berlin, Mongolian officials called on Germany to support further involvement in Mongolian transport infrastructure, perhaps involving Lufthansa as well as rail projects needed to access natural resources (particularly rare earth minerals that Germany has expressed interest about in recent years).

President Elbegdorj’s comment reveals the quality of the tourism fair and government talks as not simply Mongolia’s asking for development aid or marketing its natural resource commodities, but as Mongolia beckoning foreign partners while managing and capitalizing on these partners’ own strong impressions and ideas about Mongolia and Mongols. Since Mongolia’s Democratic Revolution (now a period of twenty-five years), films about Mongols have been another example of how Mongolians often use and negotiate with, rather than flatly deny the validity of, understandings that others have of them.

With Wolf Totem’s recent release and box office success in France, China, and Mongolia, Mongolia’s presence on the international film stage continues to demonstrate how Mongolians maintain involvement in creative works spearheaded by others and use them to build further international relations, but ones that usually remain un-depicted in international popular culture.

Directed by Jean Annaud (Seven Years in Tibet, The Name of the Rose, The Bear, Enemy at the Gates) and produced by China’s largest state film enterprise (China Film Group), Wolf Totem is based on the semi-autobiographical novel by Lu Jiamin, who penned the book using the pseudonym Jiang Rong. Translated into Mongolian in 2010, the novel was a best-seller in Mongolia as well as in China and the United States. As in the case of Sergei Bodrov’s “Mongol,” however, only one of the lead actors was Mongolian, the female love interest (R. Ankhnam in Wolf Totem as Gasmaa, and Khulan Chuluun as Borte in Mongol). A few additional cast members (including Gasmaa’s husband Batu who dies around halfway through the film) were Mongols from China and Russia.

Early responses to the book and to the film in Mongolian online journalism and associated discussions have thus far not much elaborated on the lack of Mongolian actors per se, let alone how Chinese (and Russians, in the case of Mongol and Urga) frame relations with Mongolia and Mongols in terms of gender. (See Uradyn Bulag’s collections The Mongols at China’s Edge and Collaborative Nationalism in particular for this, and the study of these films for their insight into the Chinese and Russian sides of their relations with Mongolia is definitely further merited but beyond the scope of this post).

Rather, early discussions in the Mongolian context have:

  1. Emphasized the international character of the film and the role of Mongolians and Mongolia as part of a particular international endeavor and general international community. An American connection is made by citing director Jean Annaud as “Oscar-winning” and the participation of actors from France, Canada, and Australia (http://art.news.mn/content/205496.shtml) as well as China and Mongolia is noted. Most news stories coming up in a search of “Chonon Suld” (the title of the film in Mongolian) around the release are features about Mongolian actress R. Ankhnam, and comments of “amjilt khusii Ankhnam” (“wishing you success, Ankhnam”) are common in threads below articles about the film.
  2. Debated about the accuracy with which Mongolian culture is portrayed. It is within these discussions that (widely varying) comments about the Mongolness of Inner Mongols are made and (often very strong and violently put) critical statements of Mongol-Chinese relations made. See in particular the argumentative comments on an article describing a panel of academics’ denouncement of the film’s accuracy vis-à-vis Mongolian culture (http://mnb.mn/i/48377), and a piece comparing the making of Wolf Totem to that of Urga, in the sense that Mongolia disallowed production and China saw opportunity so the films were made in Inner Mongolia: http://id.news.mn/content/205935.shtml. Recall that “Mongol” was filmed in Kazakhstan after the Mongolian government also refused Bodrov’s script. Also here (http://yellow.news.mn/content/206205.shtml) is another opinion piece critical of the film’s representation of Mongolian practices that obliquely comments on the film’s reflection of Mongolian-Chinese relations more broadly. I would emphasize however, that comments approving of the film are prevalent, including encouragements that all Mongols see the film and “khiimor sergeene” (http://art.news.mn/content/205496.shtml).

In short, through ambivalence and debate about the accuracy of films about Mongolia and Mongols that have taken prominent positions in international popular culture, Mongolians reconsider thorny issues of national and international identity and relation among themselves while enticing foreigners to visit Mongolia as the truly authentic site of the timelessly pastoral and environmentally friendly. The film will undoubtedly spur tourists to visit this summer and in years to come.

Unfortunately, creative international relations like those involved in the making of Wolf Totem (for instance the involvement of Mongolian wolves and gazelles and Canadian animal trainers: http://china.org.cn/video/2014-07/03/content_32844923.htm, http://www.chinafile.com/reporting-opinion/environment/wolf-totem-trainer-sees-risks-rewards-hollywood-china) and Jean Annaud’s dramatic shift in relation to the Chinese government: http://www.nytimes.com/2015/02/24/arts/international/china-looks-west-to-bring-wolf-totem-to-screen.html?_r=0, http://www.latimes.com/entertainment/movies/la-et-mn-jean-jacques-annaud-wolf-totem-20150228-story.html#page=1http://www.hindustantimes.com/worldcinema/china-lifts-ban-on-jean-jacques-annaud-the-result-is-wolf-totem/article1-1323753.aspx) unfortunately remain largely unportrayed in international popular culture.

The converse is true of the Sundance-winning Genghis Blues, a point of reference for many Americans interested in Mongolia, while I have not known Mongolians to claim as their own (the film was made in and about Americans and Tuvans in Tuva). Mongolian-made films shown at international film festivals vary widely in this regard, yet the most prestigious awards go to those that maintain the illusion of Mongolians as isolated and timeless (The Story of the Weeping Camel) or undergoing a violation of this isolation and along with it the disruption of supposedly socially and environmentally critical tradition (Khadag).

In any case, being perceived as quaint and naive “grasslanders,” let alone marauding hordes (in both cases as essentially anti-international) compromises Mongolian’s ability to pursue international relationships as an experienced and developed partner, as it continues to drive hard bargains in international mining projects and seek a direct flight between Ulaanbaatar and Berlin operated by Lufthansa.

(Special thanks to “Olav” for helping me access the film! I also thank him and others for their conversations about Wolf Totem on Facebook.)

About Marissa Smith

Marissa J. Smith is a PhD Candidate in Anthropology at Princeton University. Her dissertation work concerns relationships of “international friendship” in Erdenet, Mongolia, which involve Russians as well as Americans, mining engineers as well as herders. Marissa works to bring this ethnographic work to bear in conversations on alterity and translation, nationalism, corporations, development, and social mobility, particularly between urban centers and so-called rural peripheries.

Posted in Cinema, Marissa Smith, Mongolia and ..., Pop Culture | 1 Comment

A Potential Breakthrough in Mongolia’s Relations With North and South Korea

Mongolia takes a resolutely middle road when it comes to North and South Korea. It values its long-standing relations with the North while developing its newly-declared strategic partnership with the South. Due to its geographic location, wedged between Russia and China, Mongolia is often considered a “regionless” state. Therefore, engaging the two Koreas is particularly important for Mongolia as it attempts to integrate itself into Northeast Asia as well as expand its foreign economic and cultural interactions beyond China. Until now, the two Koreas have been hesitant about engaging in trilateral engagements with Mongolia, while the other major powers have, heretofore, paid little attention to Ulaanbaatar’s constructive engagements with Seoul and Pyongyang. However, the series of diplomatic initiatives that transpired over the past year suggest that the members to the Six Party Talks on de-nuclearizing North Korea—the United States, China, Russia, Japan, and North and South Korea—are changing their attitude toward Mongolia’s efforts. Meanwhile, both the Republic of Korea (ROK—South Korea) and the Democratic People’s Republic of Korea (DPRK—North Korea) are evidently beginning to seek increasing economic opportunities in and with Mongolia.

In 2014, key international players began to publicly commend Mongolia’s sustained diplomacy, which does not isolate North Korea. Notably, Japanese Prime Minister Shinzo Abe recognized Mongolia’s role in facilitating and hosting several meetings between Japan and the DPRK, especially for talks on the issue of North Korea’s abductions of Japanese citizens (Japanese Ministry of Foreign Affairs, September 24, 2014). Mongolia hosted three rounds of meeting between Japan and North Korea in 2007–2012, and a secret meeting between the abductees and their Japanese relatives in March 2014 (Japan Times, March 26, 2014). Even though Mongolia’s diplomatic efforts seemed to attract little to no attention from the United States, they have been well received in the Japanese media.

It should also be noted that last year, Mongolia organized the so-called Ulaanbaatar Dialogue, involving all Northeast Asian states. The Ulaanbaatar Dialogue’s track II format includes a city mayors’ forum, women parliamentarian meetings, and a numerous sporting activities; and North Korea actively participated in all of these programs. Chinese President Xi Jinping has repeatedly expressed his support for the Ulaanbaatar Dialogue initiative during his August 2014 visit to the Mongolian capital, as well as during a meeting on the sidelines of the Shanghai Cooperation Organization summit in Dushanbe, last September (Ikon, 22 August 2014; Dushanbe SCO Summit Press Release, September 12, 2014).

South Korean and Russian attitudes toward Mongolia’s regional role are also changing. In particular, Seoul seems to regard Ulaanbaatar as a valued partner for its Northeast Asia Peace and Cooperation Engagement Initiative (NAPCI) as well as its Eurasia Initiative (Yonhap News, August 26, 2014). Meanwhile, with the upsurge in political contacts between Russia and the DPRK in 2014, Moscow has supported Mongolia’s engagement with North Korea (38 North, November 6, 2014). Indeed, during Russian President Vladimir Putin’s visit to Ulaanbaatar last September, both sides even agreed to collaborate on using the North Korean Rason port (Ikon, September 3, 2014). Both North Korea and Mongolia, as Russia’s traditional geopolitical pivots to Northeast Asia, welcome Russia’s engagement. Whereas, it is clearly in Russia’s interest to transform North Korea from a roadblock to an entryway for reaching non-Chinese markets across Northeast Asia.

Even Mongolia’s view in Washington has been undergoing a moderate shift. US policymakers are now weighing the options of using Mongolia as: 1) an example for political and economic transitions, 2) a venue for dialogue on economic cooperation, and/or 3) a staging area for humanitarian activities in the wider region (Brookings Op-Ed, No. 84, January 2015; CSIS, December 3, 2014).

With these increasingly positive attitudes among all the major players, Mongolia may be able to capitalize on its secure domestic and political situation, as well as its political neutrality toward both Koreas, in order to strengthen its ties with potential partners across Northeast Asia. At the same time, Ulaanbaatar hopes to be able to provide more opportunities for trilateral collaboration among Mongolia, the ROK and the DPRK, especially in areas of sustainable development.

In mid-January 2015, a North Korean aircraft picked up 104 heads of cattle from Mongolia, the first shipment of 10,000 promised animals to help the DPRK develop its animal husbandry sector as a part of Mongolia’s humanitarian assistance package to this country (News.mn, January 13). Although Mongolia provided livestock (goats) to North Korea in the past, this time both sides aim to implement a much larger project, which will help the DPRK build up its long-term food-production capacity. With its traditional experience in the animal husbandry industry, Mongolia raises 51.9 million grazing animals and is re-building its export capacity to Chinese, Russian and Japanese markets (National Statistics Office of Mongolia, January 2015).

Another area that both Koreas are interested in is the leasing of fertile Mongolian land—especially along the major river basins in the eastern and northern parts the landlocked Asian country. Under a four-year-old agreement between the ROK’s Korea-Mongolia Agricultural Development Initiatives (KMADI) and the local government of Mongolia’s Dornod province, South Korea leased 30,000 hectares of land in eastern Mongolia to develop eco-friendly agriculture and livestock breeding (Korea IT Times, March 11, 2011). In the long run, the project aims to bring South Korean capital and technology into Mongolia with a long-term objective of creating sustainable sources of agricultural and livestock production.

Finally, about 30–40 thousand Mongolians live in South Korea, and 3,000 South Koreans and 2,000 North Koreans reside (or work) in Mongolia. Moreover, South Korea is becoming a major gateway for Mongolians to reach the Asia-Pacific region and North America: 65,000 Mongolians travel to and through Seoul every year. Currently, there are 20 flights in the summer and 12 in the winter between Seoul and Ulaanbaatar. Thus, South Korea has grown into one of Mongolia’s largest trading partners and has increased its investment in the landlocked country’s mining, infrastructure and services sectors. Although on a smaller scale, Mongolian businesses are also eyeing investments in North Korea, if Pyongyang gradually opens up its economy.

If these trends continue, Mongolia may appeal for even more economic and cultural collaboration with the two Koreas. And there appears to be ever greater potential for collaboration on sustainable economic projects such as agriculture, tourism and infrastructure development.

Note: re-posted with the permission of the Eurasia Daily Monitor of the Jamestown Foundation, for the original news, EDM (2015/03/02).

Posted in Eurasia Daily Monitor, International Relations, Mongolia and ..., North Korea, South Korea | Tagged | Leave a comment

Arbitration Award to Khan Resources

On Mar 2 2015 it was announced that erstwhile Canadian uranium miner Khan Resources was awarded US$100mio in arbitration proceedings administered by the Permanent Court of Arbitration based in The Hague (Netherlands). The proceedings were rooted in the 2009 cancellation of Khan Resources’ mining licenses in Mongolia and consist of $80mio of compensation + $20mio of interest.

What does this mean for Canada-Mongolia relations and for foreign investment into Mongolia?

Context

Of significant relevance is the fact that this announcement comes on the heals of the presidential pardon for three foreign employees of South Gobi Resources who had been convicted of tax evasion. This is one of a series of decisions and events since 2009 that have soured investors on Mongolia due to perceptions of shifty and sometimes arbitrary policies.

As far as I can tell (without being a specialist of any kind in these kind of arbitrations), this award is final, binding and can be enforced because Mongolia is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. A quick scan of news coverage of arbitration awards to junior mining companies seems to suggest that this award is not unusual in its amount.

Canada-Mongolia Relations

Canada and Mongolia are currently negotiating a Foreign Investment Protection Agreement. This appears to be a priority for the Canadian government and at times it has seemed that other activities regarding Mongolia have been held hostage to progress on these negotiations. While the Conservative government has made it explicit policy to pursue trade agreements, it is not clear to me who exactly would benefit from the conclusion of such a FIPA. Would Khan Resources have been in a different situation had a FIPA been in place in 2009? If you have views on this, please do comment below.

So, will this award have an impact on FIPA negotiations if these are on-going?

It’s easy to imagine populist arguments that might be made in Mongolia that would portray this as “yet another” case of Canadian greed displayed in Mongolia. Personally, I would very much disagree with this position, but its proponents would point to Robert Friedland’s role in Oyu Tolgoi, various activities around Centerra’s Boroo mine, and so forth. It is of course particularly Friedland’s controversial role that has produced most of the latent Mongolian resentment towards Canada, but for some, this award will clearly be one element in a series of events.

Note also that observers who were inclined to a negative portrayal of Canada-Mongolia relations will point to an arbitration panel that included a Canadian, L. Yves Fortier Q.C.. From what I can gather from the Permanent Court of Arbitration website, it appears to be the practice that the two parties in a corporate-state dispute appoint a member of the tribunal each and that the two appointed members then select a third member (Permanent Court of Arbitration Arbitration Rules, 2012, Art. 9). Based on that I would surmise that Khan Resources had appointed Mr. Fortier who is not only a former Canadian ambassador to the UN, but also previously presided over the London Court of International Arbitration. Clearly, his involvement and qualifications appear to be above any reproach.

It’s also easy to imagine that this narrative might produce some kind of opposition to the FIPA negotiations in particular. “See how we’re getting treated by Canada, now we’re meant to sign an agreement that protects Canadian investors further?” Perhaps this is an ignorant position, but it’s one that might well get some attention.

A more generic isolationist sentiment might see this as an instance of Mongolia being cheated by international investors/actors, rather than specifically Canadian ones and thus argue for much greater care in entering into any agreements with international investors.

Impact on Mongolian Politics

There’s the very real practical challenge of raising US$100mio to pay this award. As far as I read the announcement, Khan Resources’ legal costs will also have to be reimbursed to the tune of US$9mio.

Beyond this practical challenge that obviously comes at a very inopportune time in terms of the fiscal crisis that Mongolia is facing at the moment, the most likely impact will be a whole lot of finger-pointing to place blame on a series of events on someone and explain why every Mongolian man, woman and child now individually “owes” a Canadian company approx. ₮65,000.

Khan Resources’ licences were – as far as anyone can tell from the outside – yanked under strong Russian pressure to push into the uranium sector in Mongolia. The process was centred around passage of the Nuclear Energy Law on July 16 2009. Note that some of the evens around Khan Resources and the Nuclear Energy Law feature in a US cable that is part of Wikileaks.

So, some will surely blame Russia as the source of the pressure that led to passage of the Nuclear Energy Law. But I suspect that no actors in Russia will be particularly bothered by this blame.

The presidential election had been held on May 24. Current President Elbegdorj won his first term in this election and was sworn in as president on June 18. S Bayar was leading a grand coalition of MPP and DP at the time.

Surely, some will blame Bayar directly as prime minister for caving to Russian pressure on this. But, parliament was implicated as the Khan Resources licenses were ultimately cancelled to comply with the Nuclear Energy Law which had been passed by parliament, though without much debate or consultation.

Presumably, the DP will blame Bayar and the MPP, while the MPP might point to Pres Elbegdorj.

The fact that China National Nuclear Corporation made an offer for Khan Resources in 2010 is also likely to colour discussions.

One of the main conclusions that should be reached about this is that international agreements should not be entered into lightly, and more significantly that when you make binding commitments, you will be held to these commitments.

Impact on Foreign Investment

Some investors will cheer this arbitration award as a victory of the rule of law. As one of the members of then-PM Batbold’s delegation argued during the PM’s visit to Canada in 2010, “Would you rather invest in a country where you can take the government to court [i.e. Mongolia], or one where you cannot?”

That is true to some extent, of course. Investors are likely to be somewhat reassured that ultimately their investments may be protected by international agreements that Mongolia has entered into.

On the other hand, these arbitration proceedings began over four years ago, a period during which Khan Resources’ investment was stuck. While investors may feel somewhat compensated by the LIBOR + 2% interest awarded by the tribunal, some investors may still not be pleased with the risk of capital being tied up for that long a period.

Another view might also be that this award confirms the arbitrary interventions in mining licences that they government of Mongolia has engaged in and thus raise the spectre of future interventions.

Whatever implications and interpretations will follow this announcement, it is likely to take its place in a series of events that are structuring Mongolia’s (investment) relations with the rest of the world.

 

Posted in Canada, Foreign Investment, International Agreements, International Relations, Mining | Tagged | Leave a comment

Feeling (Politically) Pessimistic for Coming Year

It is Tsagaan Sar, so happy new year to all of Mongolia and to Mongolians! Сар шинэдээ сайхан шинэлээрэй

What will the year of the sheep bring? The sheep Gestalt (зурхай) seems to expect a windy Spring and windy early parts to seasons, good pasture this summer, and lots of snow in winter (but no dzud). This year’s cowboy is an older person suggesting a peaceful year for the elderly, wives and cattle, but tough times for younger Mongolians, especially infants, and poor people. The Khaan will be issuing strict decrees.

While I have been perpetually optimistic about Mongolia’s development and future (and still remain optimistic on the long-term prospects), I’m feeling more and more depressed about the current situation, and some worries about democracy and the 2016 parliamentary election are beginning to creep into my thoughts.

Current Crisis

After a brief moment of hopefulness (“maybe Saikhanbileg will be able to rally this super-coalition around real change”, “maybe Saikhanbileg will turn out to be a different kind of leader”), things currently look pretty dismal.

The proposal to swap strategic deposit equity for a special royalty rate looked like an initially hopeful sign, at last a step that is a departure from previous policy, but has some constructive/positive potential. Now, that hope is fading.

Why?

  • On Oyu Tolgoi, it doesn’t look like Rio Tinto is likely to be interested in this offer. They appear to be in a wait-and-see mode on Phase II especially given the high up-front investment required for the underground development and current commodity prices.
  • Is there someone else who would want to take over the government’s 34% stake? Quite possibly since the resource is obviously still very attractive, but one would imagine that any bidder would require a significant risk discount. Ch(in)alco would seem like an obvious candidate. Would Friedland be tempted to stage a “comeback”?
  • Even if there was a buyer for the government stake, what would this “special royalty” be? It seems like this would lead to yet another round of interminable negotiations with the government working at a very significant information/experience deficit so the setting of this rate would be very difficult.
  • Tavan Tologi has an even greater potential to produce some cash flow for the government quickly, but its governance has been so mired in government interference, competition between private and government businesses, foreign interests, etc. that it remains hard to think that a solution is imminent, esp. when Saikhanbileg’s honeymoon has come to a quick end, and the DP continues its current self-destructive tendencies.
  • Even Boroo’s Gatsuurt project (of obvious interest from a Canadian perspective) continues its roller coaster ride through regulation.

In the meantime, the fiscal crisis and looming debt repayments will make it difficult to continue to replace private investment with state programs like the mortgage subsidy, etc., but demands for such spending might increase from the population as growth from private investment will be limited. This seems like a situation rife to be exploited by populism, esp. as the 2016 parliamentary election draws nearer. That temptation in turn raises the spectre of a vicious inflation-debt-spending spiral that is likely to only be broken by significant private investment, most likely Phase II at OT.

Party Politics

It sure seems like the DP has made a real mess of its opportunity in government. Not all this is the government’s fault of course, commodity prices, for example, are out of its control. The government also continues to operate with a significant information deficit vis-a-vis mining and global capacity markets. Capacity has declined, if anything, due to the DP’s massive personnel shifts towards its own people in virtually all positions.

At the same time, the DP has clearly been hamstrung by its factionalism which has prevented real action even in areas that may seem ripe or attractive for action. There’s not much optimism in me in terms of hoping that Saikhanbileg or any of the other crew of DP leaders would be very likely to be able to combat this factionalism in any effective manner.

The MPP also offers no particular policy proposals or direction that would make any difference, so its participation in the super-coalition seems to be more out of a sense of obligation to the country (obviously a very attractive trait in politicians) and some willingness to address some concrete challenges. However, the MPP will obviously leave the coalition before the beginning of the election campaign (the DP left a grand coalition six months before the election in 2012 so the same seems likely a year from now), if the current coalition even lasts that long. If the MPP emerges as the winner of the parliamentary election in 2016 (though perhaps falling short of a majority), at least its party discipline allows more decisive action than the DP’s factionalism.

Democracy

The current situation then raises some worries about democracy. I have been a great admirer of the achievements of Mongolian democracy, in part on the basis of my experience as an election monitor in the last four elections.

The strength of Mongolian democracy has been rooted in two factors (not exclusively, but I do think these are very important) and it will be good to remember these when the 25th anniversary of the resignation of the MPRP Politburo comes next month:

  1. The 1990 revolution was home-made. Yes, some of the revolutionaries at the time (including people like Pres Elbegdorj, Ulaanbaatar mayor and likely next president Bat-Uul) clearly brought some reformist ideas back with them from studying abroad, but ultimately and with the Soviet Union/Russia’s hands-off stance at the time, the change was orchestrated by Mongolians for Mongolians. There was some interest in these changes in Europe and N America, of course, but very little involvement in the design of the constitution and democratic institutions throughout the 1990s.
  2. The institutionalization of democracy preceded the mining boom. Of course, Erdenet and other projects had been operating for decades, but the sense that natural resources might be an avenue to real development and prosperity did not arrive until the Oyu Tolgoi discovery, I would argue.

And now? No one would be surprised to hear of voters’ frustration with political parties in Mongolia. Lots of promises, but mostly chaos for the past 10 years. Some real improvements (economic growth, etc.), of course, but not nearly to the level promised or to Mongolia’s potential.

For now, there are no real arguments for a “strong hand”, i.e. some kind of benevolent authoritarian figure, nor a suitable candidate, but it seems like the conditions for such an argument are developing.

My main concern and worry at the moment is thus for the 2016 parliamentary election. There are a variety of proposals floating around for the “reform” of the electoral system. Ditching electronic counting, moving away from the mixed PR-first-past-the-post system, etc.

If the experience of previous elections is anything to go by, any reform proposals will be considered more seriously “at the last minute”, i.e. at the end of 2015. Changes will thus be administratively very difficult to implement and produce a certain amount of chaos.

Another concern is that the DP might well be fairly desperate. If nothing really changes in the next year, it will look likely that the DP will be trounced in the election. Will they resist temptation to try to prevent such a thumping through fiddling with the election?

The Electoral Commission is no more independent now than it had been in the past. The DP has clearly “taken over” the security apparatus with various agencies and has been accused of using agencies like the Anti-Corruption Agency (АТГ) as a political tool.

All in all then, I think there’s enough reason to be concerned about the current situation that I certainly hope that international election observers will be involved again, ideally in a well-organized efforts like the OSCE’s, but that that observation might focus a bit less on polling stations, and instead more on the general regulatory framework to the parliamentary election.

Solutions

There are no easy solutions and I wouldn’t pretend that I could change things overnight if given the opportunity either (this just to dampen speculation that I’ll be running in the 2016 election).

However, I am fairly convinced that education of all kinds is the solution.

Education to build capacity in parliament, in the government, among policy-analysts. Education has to be a tool to overcome the information deficit vis-a-vis global capitalism.

Education of the people also seems like an important antidote to populism. Until today, there still hasn’t been any concerted attempt through the education system or other channels to raise the general level of awareness of the choices that mineral resources offer. How does the mining industry operate? How does a country benefit from development of the extractive sector? What are the possible revenue streams? What are the environmental and other risks? How can investment make revenue streams sustainable?

These are all questions that Mongolians have been asking themselves and others, but the level of basic understanding of industry and policy dynamics makes it easy for critics and populists to pretend like there are easy solutions and doesn’t allow the debate to reach a level of quality where agreement on the options that present themselves (much less on solutions) is possible.

Posted in Constitution, Democracy, Democratic Party, Economics, Elections, Foreign Investment, Governance, Ikh Khural 2016, Inflation, Mongolian People's Party, Oyu Tolgoi, Party Politics, Policy, Politics, Populism, Security Apparatus | Tagged | 2 Comments