International and Domestic Commentary on Investors Fleeing Mongolia

By Michelle Tolson

Mongolia has been making international news throughout the summer and into autumn as the new government has assembled and set into motion their action plans. In the first week of September, 24 MPs lobbied the government to renegotiate the Oyu Tolgoi contract so that the Mongolian government holds 51 percent ownership when the mine becomes profitable. The contract as drafted as 2009 stipulates that the Mongolian government owns 34 percent and while Canadian Turquoise Hills Resources owns the remaining 66 percent. Yet the investment agreement as posted online on Oyu Tolgoi’s website states that the actual benefit to Mongolia exceeds 34 percent, owing to taxes and licensing fees, which put the benefits to about 71 percent (http://www.ot.mn/en/about-us/investment-agreement).
Even so, some critics assert that the deal is “flawed” and that the government was pressured into signing the agreement without adequate analysis, according to a report published by Corp Watch. Corp Watch reported that Sukhgerel Dugersuren of Oyu Tolgoi Watch NGO thinks the contract is “unfair” for Mongolians, quoting her as saying the World Bank extended “too much credit” to get the mine operational (“Mongolian Herders Worry about Impact of Rio Tinto Gold Mine”). Bank Information Center also issued a press release which critiques the World Bank for supporting the OT project (“World Bank and Others Poised to Invest in Rio Tinto’s Flawed Mongolian Mining Project”).
Rio Tinto itself, now owning 51 percent of Turquoise Hills, came under fire when the former Executive Chairman of Turquoise Hills,, approved of the sale of shares of SouthGobi Resources to Chinese-government owned CHALCO, as reported by Trefis [dot] com on September 21st (“Rio Tinto’s Mega Mine Faces Setbacks After Stirring Up Resource Nationalism in Mongolia”).

Trefis, an analysis website for stocks and investments, stated  “Shortly before Rio assumed control of Turquoise Hill, Robert Friedland, the then Executive Chairman of Turquoise (then known as Ivanhoe Mines) cut a deal to sell its SouthGobi stake to Aluminum Corporation of China Ltd.  This move caused an uproar among Mongolians, who are very particular about not letting next-door giant China assume control of the country’s resources. Mr. Friedland couldn’t have opted for a worse moment to cut this deal, for Mongolia was, at that time, going through an election cycle.” Trefis concluded that this event resulted in changes to the investment law to not allow a foreign company to own more than 49 percent. Regardless of the source of conflict, the swift change to the investment law has resulted in changes to the investment landscape of Mongolia.  Oxford Business Group’s 2012 report on the business investment opportunities in Mongolia was highly favorable regarding the investment climate; however this came prior to the changes in the investment law. Mongolia has advocated for the Third Neighbor policy in international relations, which values political partnerships with developing and developed countries that are democratic, owing to its authoritarian neighbors China and Russia which border the country.  This policy has favored investments from democratic countries as well, yet the current events have undermined this perspective.   An open letter to both the Parliament and the public of Mongolia was recently made available online in Mongolian (http://dl.dropbox.com/u/106880217/open%20letter.pdf) and apparently authored by “a union of corporate businesses and organizations” that foster investment in Mongolia.  Below is the translated version in English.    Open Letter by the Business Council of Mongolia, Mongolian National Mining Association, CEO Club, the Mongolian National Chamber of Commerce and Ministry, and other organizations.  Dear Parliament members, We would like to congratulate you for earning the trust of the public and proudly taking such responsible positions as Parliament members and wish you luck on all of your civil duties.  You have been burdened with many difficult challenges ahead but we, a union of corporate businesses and organizations, are hereby expressing our active support and cooperation with you on your way to keep all the promises made to the public during the election and reaching your ultimate goals – whether it is giving the Mongolian people employment and healthy, prosperous, successful and high-income life or building required infrastructure for industries, mining, cities and construction or improving the business environment by developing smart and flexible investment policies. In the past years, economic growth of the world has been slowing down including in countries such as the US, the EU countries and Asian countries, notably China. We see that during this economic stagnation where there is reduction in state revenues and investments due to the losing value of our nation’s core mineral exports, it is the newly elected Government’s foremost objective to improve the business and economic environment in Mongolia as well as further increasing and enhancing cooperation with the private sector, while also drawing and expanding investments by creating a stable and secure environment for domestic and foreign investors. We are thus sending you and the public an open letter regarding the above concern.  Certain laws that were hastily put into effect just before the Parliamentary elections, especially the ‘Law on Coordinating Foreign Investments for Strategically Important Economic Entities,’ coupled with the recently arising negative public view on the nation’s building and construction projects – fueled by defaming and aggressive remarks made by various sources – are putting the investments made by well-known national and international corporations and financial organizations at risk. Likewise, a law which initially intended to limit ownerships of foreign-state owned financial organizations in Mongolia ended up greatly expanding its reach just before it was put into effect – now it forcefully covers all industrial developments, stripping them off of much needed investors by creating a tough threshold for foreign investors. The projects which should have been funded and managed by laws of commerce have instead been manually set and it has created a wave of caution and fear among foreign investors, and now Mongolian business environment is universally deemed as unstable and risky.  This risky behavior in business was abruptly created by the emotional exaltation of certain social class groups and directly reflects instability in the strategy development of Mongolia. It carries with itself a number of other social risks as well, with obstructed exports from mining and construction reducing state revenues for budgeting, and is also spearheading the increase of Mongolia’s unemployment rate.  In consistent with the concern above, we as a union of many corporate financial organizations that make up the majority of Mongolia’s GDP and contribute a substantial amount to the state budget, felt necessary to deliver an open letter, expressing the thoughts, opinions and requests of all our members.  As of today, due to the newly passed laws, financing deals of large projects are now in a stalemate and some of them are completely cancelled; companies that sought to finance themselves through stocks had their stocks crashed and even companies with normal operations are facing difficulties. A recent study determined that if the Mongolian Government increased its international credit rating just by one percent by simply improving the openness and transparency of their operations would result in savings of a minimum of USD 500 million on loan interests for projects that will continue until 2017. Today’s situation is direct the result of routinely approving business-investment related laws and regulations without any study or research and without consulting and discussing them with the public or other concerned groups. Thus we request that when passing any laws or regulations on taxes and investments that may negatively affect the economy and the business community of Mongolia, they should be based on solid research and in-depth study, as well as discussing the matter and reflecting the opinions of the private sector. In this open letter, we are expressing our utmost readiness in being involved with any laws or regulations which will be developed in the future.  Our common goals for the benefit of our nation have led us to write this letter.

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Posted by on Sep 28 2012. Filed under Opinion. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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