By Julian Dierkes
The Mongolian government has been battling a homemade economic crisis for some two years now. It has been a largely self-inflicted crisis brought on by some hasty policy decisions regarding investments that have led to a massive loss of (foreign) investor confidence, coupled with some large-scale public borrowing and spending on variously popular and populist projects.
In May this year, I wrote an editorial in the UB Post that tried to make the case that the main task for the Mongolian government should be to get Oyu Tolgoi (construction and operations) (back) on track. There are some tentative signs this week that Mongolia is coming up to a turning point for short and medium-term economic development. The long-term prospects for Mongolia have not really been in doubt given its mineral wealth and positive factors like a small population, democracy, and a young and educated workforce.
Two pieces of news came in the last days regarding the giant Oyu Tolgoi project which is controlled by Rio Tinto but in which the government of Mongolia holds a 1/3 stake: First, a tax dispute seems to have been settled on mutually agreeable terms, but perhaps more importantly, a new feasibility study that examines the continued construction of Oyu Tolgoi underground has been released. These two pieces of news may be just the impetus that continuing discussions between Rio Tinto and the government have needed. This is especially true as a September 30 deadline from banks regarding the financing of the expansion looms.
Resolution of Tax Dispute
The resolution of the tax questions is hopefully an indicator that both parties recognize the importance of cooperation in all areas. Obviously, the Government of Mongolia should expect Oyu Tolgoi to fully comply with all regulations and laws of Mongolia, but Rio Tinto as the partner in Oyu Tolgoi should also expect cooperation form the Government in the form of the pursuit of a productive relationship.
OT Feasibility Study
The feasibility study is important not because of the price tag it quotes for underground expansion (which is in line with previous estimates), but because costs for construction up to the beginning of production had been a bone of contention for over a year between Rio Tinto and the government of Mongolia. Some of the costs associated with construction of above-ground facilities and some underground operations had been questioned by Mongolian officials. President Elbegdorj raised many of his concerns in a speech to parliament in February 2013. As part-owner the Government of Mongolia balked at approving further expansion until a feasibility study provided some potential clarity on costs that would arise from this expansion. The feasibility study announced US$4.9b as the necessary expansion of capital for underground operations.
The costs incurred in construction crucially determine any calculation on part of the government for when they might actually begin to see income streams from their stake in Oyu Tolgoi following the massive up-front investment costs of a block-caving operation.
Up until the announcement of these news items, there had been very little movement on discussions between Rio Tinto and the government for a very long time, at least no movement that was publicly visible. Obviously, some of the discussions between partners in a commercial venture ought to be held privately, but the Mongolian public certainly deserves to be kept informed about significant progress in negotiations. While government officials had claimed that such progress was being made in the last year, there was little evidence for such claims giving rise to suspicions that Rio Tinto may be relatively happy to accept a stall in the interest of avoiding further capital investments at a time of financial strain, or to seek out investment in the project by some other third party which would complicate matters for the government, especially if that third party was a Chinese concern.
The fact that the announcement of the feasibility study has come from Rio Tinto (via Turquoise Hill Resources, its Oyu Tolgoi “vehicle”) suggests that strategic decisions for further construction and expansion may have come from Rio Tinto and potentially alleviating the fears about contrary plans.
If these announcements are indeed a turning point in the relationship between Rio Tinto and the government, this comes at an opportune moment.
Not only is the financial crisis in Mongolia growing more acute with the massive decline in FDI and the ballooning of debt, but Mongolia is also potentially being squeezed by its immediate neighbours, Russia and China, in the context of a cozying up to China by Russian Pres. V Putin following his ostracism by European and North American countries over the Crimea and Ukraine.
While any agreement between Russia and China poses no existential threat to Mongolia, it is likely to constrain the country in terms of its foreign policy options. For example, is there room for Mongolia to not participate in a proposed Russia-China-Mongolia customs union even though the Mongolian meat sector may be the only potential beneficiary while other benefits would primarily accrue to Chinese and Russian exporters? Pres Elbegdorj’s tightrope walk to retain Mongolia’s observer status at the recent meeting of the Shanghai Cooperation Organization points to some of the challenges that Mongolia will face in coming years.
This context is relevant to the OT decision because the recent visits by Pres Xi and Pres Putin involved a warm embrace of economic “goodies” on offer in terms of investments and commitments to infrastructure projects, etc. These overtures along with the likely participation of Chinese and Russian investors in the offering of new exploration licenses in Mongolia (delayed from the originally planned Sept 24 date) might signal an ever-increasing economic collaboration with the immediate neighbours that will be balance well by a reassertion of foreign (ie non-Chinese and non-Russian) interest in OT.
It is also hard to imagine that any Russia-China collaborations would support Mongolian democracy in any way should it ever be challenged by deepened economic crisis. This would be especially unfortunate as Mongolia is just beginning to play a role in democracy-promotion around Asia, particularly vis-à-vis the Kirghiz Republic and, potentially, Myanmar.
Contrary to Mongolia’s potential role in democracy promotion, the current developments may come just in time in terms of the electoral cycle as well. Almost two years remain before the next parliamentary election and already the rumour mill about a replacement of the current governing coalition by a grand coalition has been heating up all year. Any decisions about Oyu Tolgoi that do not come very soon are likely to be doomed by politicization of the process and the looming electoral campaign.
Not out of the woods, but…
There is nothing definite in the current news that spells out a quick resolution of the Oyu Tolgoi disputes between Rio Tinto and the government, but for the first time in a while, there is some concrete and positive movement.