Foreign Investment to Mongolia: Restrictionsand Comparisons with Canada

By Julian Dierkes

There has been a flurry of writing on foreign investment in Mongolia in English-language media recently, from newspaper accounts to more scholarly arguments from think tanks and the like. To my mind, many of these writings have taken the perspective of a foreign investor, rather than the perspective of Mongolian policy-makers or any Mongolian, really.
Since the Chalco bid for South Gobi Resources prompted the passage of a Foreign Investment Law by the Mongolian parliament in May I’ve been struck by some of the parallels between this law and its counterpart in Canada. Below I examine these parallels and Mongolian policy regarding foreign investors in light of the recent decision by the Canadian government to approve two bids by state-owned companies for companies in the Canadian oil sector.

Feeding the Hungry Dragon

One of the most substantial pieces on Mongolia has been a policy update for the Canadian Defense and International Affairs Institute(“Feeding the Hungry Dragon: Canada, Mongolia and China’s Resource Strategy”,November 2012) by Charles Krusekopf and Hugh Stephens, two authors definitely worth paying attention to. Krusekopf is the founder and continues to serve as the Executive Director of the American Center for Mongolian Studies. [Disclosure: I serve on the Executive Committee of the Board of Directors of the ACMS.] Stephens has had a stellar career with the Canadian foreign service and in the private sector, mostly in Asia. He knows policy-makers and policy-making processes in Asia intimately.
In their piece, Stephens and Krusekopf argue that Mongolia offers a cautionary tale for the Canadian government as it makes decisions about resource investments in Canada by foreign investors. They echo some of the concerns – or complaints – voiced by many other writers about foreign investment in Mongolia. They argue that the foreign investment law has raised the political risk for investments in Mongolia, particularly for Chinese investors, but as a quasi-collateral damage, for all foreign investors.

Similarities and
Differences between the Mongolian and Canadian Foreign Investment Law

Before I turn to developments in Mongolia, a quick note on the parallels between the Canadian and Mongolia Foreign Investment Law. This is relevant as Canada is not only an established mining jurisdiction, but has been identified in Mongolia as a potential model for regulatory decisions about the extractive industry.
The greatest similarity is the fact that such a law exists and that this law demands a government review of foreign investments in certain industries.
The Canadian government recently reviewed the bids of two Asian state-owned companies for Canadian companies. Chinese CNOOC bid for Nexen, a company active in the oil sands, and Malaysian Petrobas planned to purchase Progress, a natural gas company. These bids were approved on December 7 after months of delays and active debate.
With their approval the government announced that in the future bids from state-owned enterprises (SOEs) would only be approved under “exceptional circumstances” and that bids exceeding $330mil from SOEs would require review, while private bids would only be scrutinized if they surpassed $1bil. The argument that the government presented for the restrictions on SOEs focused on the fear that such bids would put an important sector of the Canadian economy that was emerging in a free market context under more or less direct control of a foreign government. Memorably, Prime Minister Harper argued that, “When we say that Canada is open for business, we do not mean that Canada is for sale to foreign governments.” While the government denied that this was a response specific to Chinese investments, clearly the decision was made in a context of expectations of increasing investments from China.
The Mongolian law has also made an explicit distinction between private and SOE bids. It outlines sectors that it applies to (the resource sector is included, naturally) and thresholds at which different kinds of reviews are triggered. A large bid by a foreign investor or any bid by an SOE would thus trigger a review by parliament.
One of the differences between the Canadian and Mongolian context is that decisions on FDI in Canada come in the context of a stable regulatory regime that offers predictability and the attempt to balance investors’ expectations with Canadians’ needs. Stability in the regulatory regime has not been the strong suite of Mongolian mining regulation.

Mongolia as a Cautionary Tale?

Resource nationalism has been one of the themes that non-Mongolian writings about a the Mongolian context have focused on. This is generally equated with some evil movement aimed at nationalization of resource assets.
In Mongolia this claim is most commonly linked to the demand by some parliamentarians and parts of civil society that the Investment Agreement for the OyuTolgoi mine should be revisited.
But one observer’s resource nationalism is another person’s attempt to preserve the resource wealth of a country and to reap its benefits for current and future generations. The former is a foreign investor, while the latter is a Mongolian.
I would be the first to agree that the process by which Mongolian policy-makers have arrived at some decisions has not been ideal (in the sense of a careful decision that is based on a thorough and dispassionate analysis of available information) – in fact, this process has been awful at times, including the unproductive broad calls for renegotiation without acknowledgement that such renegotiations require the agreement of both parties – but I cannot fault Mongolians or their leaders for their desire to get this decision “right” and their fears of getting it “wrong”.
Striking the appropriate balance between material needs, social aspirations, environmental and cultural protection, and, yes, financial rewards for investors, is not an easy decision. Jurisdictions that have had decades to arrive at appropriate mechanisms for this decision are still struggling with these issues.
Clearly, discussions and legislative initiatives in Mongolia have raised political uncertainty in investors’ eyes. But have enough investors been scared to have an impact on Mongolia? Is the OT mine not such a gigantic project in a resource-hungry world that scaring off some investors might not have a negative impact?
Sure, there is a line where all investors might be scared, but I do not think that Mongolia has crossed that line. Witness the Chinggis Bond sale late last year, raising $1.5b, but attracting orders for ten times that amount. Yes, Mongolia with its BB- S&P rating is paying 5 1/8% on these bonds, but that is cheaper credit than Italy has been able to get recently, so not too many bond investors seem scared off. In the end, there are many investors in the world who have read the news that Mongolia was the fastest growing economy in 2011 and who want to participate in this presumed bonanza.
If a country is so dependent on mining for its future, is a slowdown not a reasonable cost to pay for a more careful (if not always carefully executed, and sometimes even recklessly so) deliberation?
After all, the natural resources in question are unlikely to vanish in Mongolia (or in Canada) and nor is demand for them, at least in the medium-term future.
It is important to note, however, that foreign direct investment seems to be somewhat of an example of herd behaviour, especially in the mining industry. The perception of political risk might thus be more important in some circumstances than the actual risk. This is certainly more the case for a place like Mongolia where much of the information (including this discussion) is about perception rather than a measured empirical reality and where information about the country is still relatively limited internationally.


Canada and Mongolia are not alone in the world in wrestling with the appropriate regulation of the natural resource sector. While Canada has a long-established resource sector and its provinces have developed regulatory practices over many years, the need and scope for regulation in Mongolia is much more urgent and larger given the sudden nature of the expansion of its mining industry.
The greatest hurdle to the development of a successful regulatory regime (i.e. one that makes the greatest possible benefit to all Mongolians possible while minimizing social convulsions and environmental impacts associated with rapid development) are the selfish actions of leaders. Mongolian decision-makers must surely be aware of the responsibility that they are carrying for ALL Mongolians.
The next challenge is an on-going lack of policy-analysis and policy-making capacity within Mongolia. As the demands for policy-making are accelerating with the impact of a mining boom on all areas of government activities and social relations, this will be what might hold Mongolia back, not a lack of foreign investment.
When members of the mining industry in advanced industrialized countries complain about governance and regulatory uncertainty in places like Mongolia, they would do well to note shared challenges and some of the parallels in the solutions that policy-makers hit upon.
There ARE lessons in the current discussions for Mongolia, to be sure. An awareness of the perception of regulatory initiatives abroad is surely important to build up.
Mongolian policy-makers might also put themselves in the shoes of the next generation of Mongolians when it comes to investments. If the current generation succeeds in building (financially) sustainable success in the current boom times to carry them through leaner years that will certainly come, then this success might well include some version of a sovereign wealth fund.
Such a fund would seek to diversify its holdings internationally and would be regarded as an SOE in some jurisdictions. If Mongolian policy excludes some forms of such investments now, policy-makers should not be surprised if they will be excluded in the future.

Julian Dierkes is an associate professor at the University of British Columbia’s Institute of Asian Research in Vancouver, Canada. He has been actively building interest in and expertise on Mongolia at his university and in Canada more broadly for some years. He is the editor of Change in Democractic Mongolia – Social Relations, Health, Mobile Pastoralism, and Mining (Brill, 2012). He has received some donations to support research on Mongolia and Mongolian graduate students from private individuals and corporations in the mining industry, and the Canadian government in the past. Follow him at twitter.com/jdierkes or read his “Mongolia Today” blog posts at blogs.ubc.ca/mongolia


A shorter version of this article was published in East Asia Forum (http://www.eastasiaforum.org/2013/01/09/mongolias-evolving-foreign-investment-regime/) on January 9, 2013.

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