By Julian Dierkes
How can I resist the following challenge?
So what do you think is the key to resolving the OT situation? MPP controls government, so clearly decisions can be taken. What about Rio’s behaviour? Is GOM being unfair? What should $RIO do, in your opinion – as a life-long observer of Mongolian politics and culture?
— Tolgoibaatar (@tolgoibaatar) November 5, 2021
Before I get into my analysis of the dynamic that has led to negotiations, and my suggestions for how to address that analysis, some notes below on my sense of the negotiations themselves.
As Tolgoibaatar notes in another tweet, I am an academic, so perhaps not surprisingly, I want to acknowledge some obvious limitations on what I say below. I’ve moved those caveats to the bottom of the post to let readers get into the meat of what I am saying first, but then to interrogate that given these caveats.
- Mongolians want to see OT developed. That is, even when informed about some risks (eg, displacement of herders, water, corruption), Mongolians have chosen and would choose to develop the mine. I have not seen this fundamentally questioned by any political actor.
- The economics of the mine and of developing it, are sound, ie, ultimately – even after massive up-front-investment, the deposit is so rich/large and long-term copper demand stable enough, that the project will show a return on investment. Despite various hiccups, I have not seen this questioned either.
- It is the explicit task for both sides (investors and the government) to maximize benefits for their stakeholders. The project can only go forward by balancing those benefits.
- The project is of huge significance to Mongolia’s future, so broad-based social license to operate is even more crucial, perhaps, than with smaller projects.
Outlook for Negotiations
Given the assumptions above, I think that the parties will reach some kind of agreement. Neither side (investors and the government) want or can afford for the project to fail. Clearly, there are complicated relations between Turquoise Hill, its minority investors, and Riot Tinto [<- ???? a typo, that others have probably made, but I hadn’t yet, so I left it in while editing. It’s a close cousin of You Tolgoi in this context.], but here, I am treating the negotiations as if they involve two parties, investors and the government.
I cannot guess as to what exactly might bring about an agreement in the current negotiations. Abstractly speaking, the government will need some concession that they will be able to present to the Mongolian public as a significant advance from the Dubai Agreement. When I say “government” in this case, I see this as being primarily PM Oyun-Erdene rather than Pres Khurelsukh who is somewhat removed from these issues as he generally was while he was prime minister. I cannot guess what that concession might be. I cannot think of any entirely new element to be introduced into the agreement (may well be my limited understanding, however), so I think it is more likely that some tax/royalty/management rates will be adjusted or that government debt will be restructured somehow. There is always the chance of a change to the equity structure, i.e. for TRQ/RT to buy some portion of the government’s stake. That is a bit of a wildcard and could happen, but I have not seen any hints of such a more radical reconfiguration.
The challenge may be that everyone would like to reach a conclusion to the negotiations sooner rather than later, but if I had to guess, I would fear that the government may not be come to the negotiations with a specific set of asks that the investor side might evaluate as to their impact on their return on investment. Obviously, those asks would not be public (and thus my) knowledge, but I have seen little in the run-up to the process, nor any statements since, that would suggest that there was a specific set of demands to begin with.
Beyond the Negotiations
While I do think that the negotiations will be concluded with some kind of agreement, I do not think that this agreement will address the fundamentally challenging dynamic in the relationship between the Mongolian public and Rio Tinto. I would therefore guess that chances are high that there will be another set of negotiations with similarly murky goals within less than ten years.
A continuing cycle of agreements and negotiations strikes me as far more likely than either side pulling out in any meaningful way. Pulling out for Rio Tinto would presumably mean selling its stake in TRQ to another investor, most likely a Chinese investor, I suppose though that would immediately raise the question of who would actually operate the project and would be capable to operate it given the challenges of block caving.
For the government, pulling out would mean something really radical like nationalization. That strikes me as very unlikely in the current situation, though perhaps less unlikely than I would have said five years ago, for example, largely due to geopolitical developments where the increasing aggressiveness of the Chinese regime and hints at a bipolar world with U.S.-focused and China-led blocks, adds general uncertainty to Mongolia’s outlook.
What Can Be Done?
Another post will be coming that suggests three ways in which the cycle of negotiation-dissatisfaction-demand for more negotiation can be broken, I think.
The Search for a Perfect Agreement
In a separate post, I will write about another aspect that is contributing to the cycle of negotiations of an OT agreement: a perspective that sees policy-making, politics, but also this kind of negotiation as a quest for a perfect (or perfectly fair) agreement, as opposed to the recognition that this kind of agreements like all political decisions is fundamentally a compromise that satisfices rather than optimizes.
The biggest caveat: As I’m learning repeatedly in my own policy practice (as an associate dean in UBC’s Faculty of Graduate + Postdoctoral Studies), details on constraints and on implementation of policies are often very difficult to discern from the outside. What I say below is thus more of an editorial regarding general directions, rather than advice for immediate or specific action to any of the actors.
Another caveat: I have no insider knowledge lest anyone read this as suggestion any insights that might drive your investment decision. While I am happy to speak to people involved in conversations on all sides, they generally ask me for my views rather than sharing their positions.
Conflict of interest: I have performed consulting services for Rio Tinto, Turquoise Hill, various parts of the government of Mongolia, some related to mining governance in particular. But, I talk to everyone who is interested and am thus quite confident that I am in no one’s pocket. I certainly do not speak for any of the actors involved.