Why Mongolia’s China Mining Strategy is NOT a Mistake!

In the recent blog of the Wall Street Journal, Drs. Erickson and Collins argued convincingly that resource nationalism and discriminative policies regarding Chinese investors in Mongolia will have a negative impact on Mongolia’s economy. And they downplayed Mongolia’s attempts to extend its railways to reach the Russian Pacific ports. Yes, they are right about the role of geography and importance of Chinese investment and infrastructure for Mongolian mining exports. But, there are other considerations that are missing in their argument.

Before making quick conclusions on either anti-Chinese attitudes or resource nationalism, there are other rationales forcing Mongolian politicians to make a unanimous decision to limit the investment of the foreign state-owned enterprises in key economic projects.  Since 1990, Mongolian citizens have always been able to challenge the government’s key political and economic decisions if it is against their will, livelihood, and future.  This time, Mongolian people did not oppose the parliamentary decision of restricting Chinese investors because they want responsible and sustainable mining.

Arguments made by Erickson and Collin are, of course, shared by a number of Mongolian mining companies that are benefitting from the recent mining boom and the weak mining regulatory policies which could not hold mining investors accountable for responsible mining.  They want to sell more coal to China, but they have little to say about environmental degradation and social-economic consequences caused from extensive, careless mining operations.  Erickson and Collin will be touched if they compare images of the Mongolian southern provinces now and two decades ago just to see the environmental degradation in the world-renown Gobi desert.  Similar heartbreaking images are haunting people living in northern China or the Russian Far East.  Mongolian politicians made attractive, weak mining regulations during the economic downtime in the mid-1990s; as a result, many mining companies showed up and others, including many Chinese companies, secured licenses. The majority of license holders have conducted extensive mining exploration and extractive operations.  The irresponsible, careless mining of both foreign and domestic companies have caused public outrage, with calls to strengthen the mining regulations and make the license-issuance business transparent.  The latest efforts to investigate corruption in the mining regulatory institutions, to suspend the issuance of mining licenses to foreign investors, and to increase Mongolian shares in strategic mines are a few visible responses taken by Mongolian politicians for the public outcry.  Apparently, it also provides the ground for populist politics. The long-term investment agreement with Rio Tinto demonstrated sustainable and reliable mining were the main concerns for Mongolia.  These will be the overriding concerns for all other major projects, including Tavan Tolgoi.  All three neighbors, China, Mongolia, and Russia, are today striving for Western technology and improving the responsibility of mining companies, while keeping in mind each other’s capabilities and mining practices.  But all seem to agree that Western companies have a rather long record of corporate social responsibility.

Like any other nations, reliant on the extractive industries, Mongolians also want to make more value out of their natural resources because they are not renewable.  The establishment of short rail links with Chinese processing factories will benefit only a few mining companies, accelerate extraction process, and increase the Chinese reliance on low-cost coal from Mongolia.  Of course, it will generate short-term revenues from coal exports, but it will not reclaim the virgin lands of the Mongolian Gobi.  On the other hand, Mongolia’s policy to expand its rail links by connecting key mining deposits and extending its reach to Russia’s Pacific Ports have more promises than these short term gains.  First, the major infrastructure projects such as rail road and industrial complex Gobi area will offer employment opportunities for thousands of Mongolians.  Second, it will facilitate future economic interactions with marginalized, poorly developed Mongolia, the Russian Far East and eventually, another route for East Asia.  Third, Mongolians have access to both Russian and Chinese ports to the East Asian market, plus a European link.  The authors might be right at the current time, but the market will change.  One day Mongolia may turn into an importer of coking coal – at which point it would be better to weigh the costs of the two transport options.  Many Mongolians are looking beyond “Mine-golia”, as a new nickname for Mongolia, to build industrial capability for value-added mining products, to diversify its economy by re-investing into crop plantations and animal husbandry, and to improve the responsibility of mining industries. Due to inevitable economic dependence on China (remember, Chinese small and medium mining companies hold far greater number of licenses than other foreign investors), Mongolia does indeed avoid any further increase in economic dependency from any single investor.  This is the concern shared by any nation state.  For instance, Australia prohibited the participation of Huawei in the national network band tender and Mongolia did the same for Chinese ZTE two years ago.  Mongolia’s experience of overdependence on the Russian economy and investment are still haunting Mongolians politicians.  Giving away major tenders to both its neighbors will only consolidate their already influential economic leverage on Ulaanbaatar; therefore, Mongolia must at least attempt to invite others to diversify its economic partners.

Mongolia’s decision to limit the Chinese state-owned enterprises is similar to any state with giant neighbors. The unanimous decision is not a result of anti-Chinese attitudes or over-exaggerated resource nationalism.  It is the reflection of a public outcry against the past two decades of irresponsible mining and their desire of developing their economy by expanding infrastructure, introducing corporate social responsibility, and diversifying its economy. Therefore, the Mongolian mining strategy is not a mistake.

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