Mongolia Riches See Voters Seeking Handouts as Investors Groan

On a sunny afternoon in Mongolia’s capital Ulan Bator, vans festooned with the flags of political parties careen down potholed streets, loudspeakers touting their candidates’ virtues ahead of June 28 parliamentary elections. Students march through the city center wearing t-shirts bearing the images of some of those vying for the 76 legislative seats. Unemployed plumber Dorjsuren can’t get into the spirit.

Dorjsuren, who like many Mongolians uses only one name, says he hasn’t benefited from economic growth that hit 17.3 percent and foreign direct investment of $5.3 billion -- more than half the national gross domestic product -- in 2011.

“Right now Mongolia is rushing to give away its land and resources to foreigners, and it makes me deeply angry,” Dorjsuren says from his wooden shack in an Ulan Bator slum, where most live in round felt tents called gers. “Our government does nothing for the people while the rich just get richer.”

Dorjsuren’s dissatisfaction reflects growing anger among Mongolia’s 2.8 million people about the way politicians are handling of the country’s mineral resources, Bloomberg Businessweek reports in its June 25 edition. Incoming parliamentary leaders will need both to respond to that pressure and to anxiety among businesses that tighter limits of foreign miners’ investments and runaway inflation are making Mongolia less attractive.

Mineral Wealth

Mongolia has gold, iron ore, copper and coal, and its 10 biggest mineral deposits are worth more than $1.3 trillion, according to estimates by Quam Asset Management. Seeking greater returns on those resources, lawmakers approved a foreign investment law in May that requires parliament to approve deals in which overseas investors hold more than 49 percent of the equity and for transactions of more than $75 million in strategic sectors -- including mining.

The legislation was sparked in part by an attempt by the Aluminum Corporation of China to purchase some mining assets. Politicians have also proposed rewriting tax treaties that have allowed many foreign mining companies to limit their effective tax rate to close to zero.

“We don’t want people to come in and clown around and escape with whatever hot profits they make, without contributing to the well-being of Mongolians,” Vice Finance Minister Ganhuyag Chuluun Hutagt says during a break between campaign stops.

Deals Reopened

Companies are expressing concern over calls to renegotiate existing deals, including a $6 billion copper-and-gold mine that is managed and part-owned by Rio Tinto Plc. (RIO) Some lawmakers want to boost the Mongolian government’s share in the mine, called Oyu Tolgoi, or Turquoise Hill.

“We have these possibly time-consuming hurdles that have to be crossed that could hurt the prospect of deals getting done,” says Jim Dwyer, executive director of the Business Council of Mongolia, an advocacy group for some 200 international and Mongolian businesses.

Mining amounts to one-fifth of the economy and supplies a third of government revenue in a country with gross domestic product of $8.2 billion. Last year’s economic growth was driven by a 56 percent surge in government spending, including cash handouts. That’s stoked inflation: Food prices jumped 31 percent in April over the same month last year.

Nearly 60 percent of Mongolians indicated that “earnings were insufficient to meet their basic needs,” up from 39 percent in January, according to a World Bank survey released in June.

`Resource Nationalism'

“Mongolia needs foreign expertise and foreign capital to help develop its resources, despite talk of resource nationalism,” says Cameron McRae, chief executive of Oyu Tolgoi. “The next step for Mongolia should be an informed, national-level conversation about how to use the profits from mining for the long-term benefit of the country.”

Business executives also don’t like the inflation. They include Graeme Hancock, chief operating officer at state-owned coal miner Erdenes Tavan Tolgoi LLC. Hancock says 2008 campaign promises to give every Mongolian citizen a 1.5 million tugrik ($1,125) handout will add to inflation pressures.

“The reality is if they did pay all of this out, it would be enormously inflationary,” making it more costly to do business in the country, Hancock says.

One obstacle to a more equitable distribution of the proceeds from Mongolia’s mining boom is corruption. Transparency International, an organization focused on graft, ranks Mongolia 120th out of the 183 nations it surveys.

Former Leader

In April, former President Nambaryn Enkhbayar was arrested on charges of enriching himself while in office and barred from participating in the upcoming election. Enkhbayar and his family see the move as an attempt by the current administration to sideline a rival.

“What we are seeing now in Mongolia is not a real rule of law, but instead something that is common in many post-Soviet republics,” says Enkhbayar, who is free on bail. “The ruling party is trying to use the law and law enforcement agencies to get rid of its political opponents.”

The election pits the Mongolian People’s Party against the Democratic Party, now ruling together in a coalition. The DP describes itself as a party that aims to foster a middle class with lower taxes. The MPP is the successor of the Communist Party, which ruled Mongolia for most of the 20th century.

About 60 percent of Mongolians believe government policy is characterized by either “support for the rich” or “lack of concern for society at large,” according to a survey released on June 17 by the local Sant Maral Foundation.

Even as the boom has spurred new jobs, with unemployment falling to 9 percent last year from 13 percent in 2010, almost one-third of the country’s people live in poverty.

“The biggest issue really is how to invest the mining revenues strategically, but also in way that is equitable, so it also gives economic opportunities to everybody, not just to the rich and well-connected,” World Bank country director Coralie Gevers says.

To contact the reporter on this story: Dexter Roberts in Beijing at droberts34@bloomberg.net

To contact the editor responsible for this story: Cristina Lindblad at mlindblad1@bloomberg.net

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