By Julian Dierkes
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?
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 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.