Mongolia: A Lucky but Difficult Pie to Slice
The rapid inflow of huge amounts of investment cash is forcefully dragging the small economy of Mongolia forward, despite numerous problems plaguing the Government and related crucial decision-making bodies.
Mongolia is probably one of the few lucky countries on earth. When the Manchus were defeated by the Red Soviets and left Mongolian territories and its people alone, Mongolia’s fate was at the mercy of the Russians. Due to the Russian belief in expanding their political and economic views, Mongolia became the second communist country in the world and luckily, for over 70 years we were nurtured under the benefit of being a comrade of the Soviets and our nearly extinct population of mere half a million grew to over two million and modern concrete buildings built all around the country.
Great luck has struck us again, this time in the form of our mineral resources.
Mongolia’s potential for economic growth is great, just like its great political and economic instabilities and risks, but apparently the financial benefits for the ones who help Mongolia to realize its potential seems even greater. Yet this process appears that it will be a long and hard journey.
We are sometimes referred to as “beggars sitting on gold” and ironically that phrase definitely has some truth to it. Mongolia has a colossal amount of mineral resources beneath its soil. Oyu Tolgoi will be the largest copper mine in the world outside Chile, while the Tavan Tolgoi mine has one of the largest coal deposits in the world. But how can Mongolia, a country which only just recently made an aggressive but prompt transition from a socialist economy to that of a free-market one and saw the disappearance of dozens of industries overnight, realize its potential?
It has been a hard haul since 1990 to come here into the 21st century with our previous rather slow development in the economy. By that time, we realized what riches were under us and that we did not have the manpower to dig them up; and we also calculated how much money (which we came to also realize that we do not have) it would take to get them out. So Ivanhoe Mines steps in and proposes they would dig them up for us and in return, they would get a share of the profits.
For a few years, Ivanhoe Mines and its investors poured money into Mongolia until they ‘ran out.’ Ivanhoe Mines negotiated financing deals with Rio Tinto, and ultimately Ivanhoe Mines CEO Robert Friedland stepped down and Ivanhoe Mines was taken over by Rio Tinto, effectively placing the development responsibility of Oyu Tolgoi on Rio Tinto.
Mongolia’s only real job in this seems pretty simple: maintain healthy foreign relations and develop careful investment laws and policies and let Rio Tinto what they need to do.
Now in addition to having the Soviets build our basic infrastructure, we will have Australians dig up our minerals for our own benefit.
Mongolia’s business and political environment has been labeled as ‘risky and unstable.’ It still is considered so, might be even worse than previously thought, given the occurrence of certain events involving SouthGobi Sands and Sarah Armstrong lately.
According to the Michigan State University Risk Assessment on Mongolia, both the business and country rating for Mongolia was considered a ‘C,’ with ‘A’ being the highest rating. The report states that Mongolia’s business environment is “difficult,” and continuing “corporate financial information is often not available and when available often unreliable. Debt collection is unpredictable. The institutional framework has many troublesome weaknesses. Intercompany transactions run major risks in the difficult environment rated C.”
With no official word from authorities on the situation with Sarah Armstrong and her being considered a witness in a case involving SouthGobi Sands, it may further prove the instability of the business and political environment of Mongolia.
Rio Tinto has already put a lot into the project; all it will have to do is just bear through this, taking whatever measures are necessary. Mongolia could be an easy pie to slice for investors but with the way things are heading, it does not seem it will be that way.
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