Mongolia Seeks Economic Lifeline With Pivot to China, Russia

Photographer: Brent Lewin/Bloomberg

The Oyu Tolgoi copper and gold mine in Khanbogd, the South Gobi desert, Mongolia. Close

The Oyu Tolgoi copper and gold mine in Khanbogd, the South Gobi desert, Mongolia.

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Photographer: Brent Lewin/Bloomberg

The Oyu Tolgoi copper and gold mine in Khanbogd, the South Gobi desert, Mongolia.

After two decades courting Western investors and political allies, Mongolia is refocusing on foreign ties closer to home seeking to revive its economy.

China’s President Xi Jinping is scheduled to arrive tomorrow in the country landlocked between his nation and Russia, as Mongolia’s economic woes mount. Growth is the weakest in four years, foreign investment has plummeted, inflation is rising and the currency has plunged to a record low.

Xi’s trip to the mineral-rich nation, the first by a Chinese president in 11 years, comes ahead of the expected visit of Russian President Vladimir Putin about two weeks later. As analysts anticipate deals or negotiations from energy to infrastructure, the visits signal a pivot to Russia and China as a prolonged spat with Rio Tinto Group over Mongolia’s biggest ever investment has cooled foreign interest in the nation.

“The timing is critical,” said Peter Morrow, partner at NovaTerra LLC, which advises on projects including energy, from Ulaanbaatar. “Both China and Russia are keenly interested in Mongolia’s resources, and both know that the country is going through a rough economic patch.”

Since breaking free from Soviet influence and becoming a democracy in 1990, Mongolia -- with an estimated $1.3 trillion of natural resources -- has tried to counter the leverage of Russia and China by seeking ties with so-called “third-neighbors” including the U.S. It has sought to woo investors including Peabody Energy Corp., Anglo American Plc and South Korea’s Samsung Engineering Co.

Photographer: Brent Lewin/Bloomberg

A man takes a photograph in the desert in Mandalgovi, Dundgovi province, Mongolia. Close

A man takes a photograph in the desert in Mandalgovi, Dundgovi province, Mongolia.

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Photographer: Brent Lewin/Bloomberg

A man takes a photograph in the desert in Mandalgovi, Dundgovi province, Mongolia.

China Deals

The nation is turning to China, its biggest trading partner, and Russia after foreign investment collapsed 70 percent in the first-half. Investment plunged amid an already 18-month dispute with key investor Rio Tinto and after Mongolia passed more nationalist-minded investment laws in 2012, that were later reversed.

“Everyone is dealing with China,” Mongolia’s vice minister for mining Erdenebulgan Oyun said last month in an interview. Among potential deals expected to be signed during the Chinese leader’s visit is a gas project and supply accord with China Petrochemical Corp., known as Sinopec Group, according to Erdenebulgan.

Energy, transport and infrastructure agreements will be on the agenda during Xi’s visit, assistant Chinese Foreign Minister Liu Jianchao said on Aug. 18 in Beijing, with an aim to give Mongolia better access to ports and overseas markets for its natural resources, including coal. Cooperation is a priority for both governments on port corridors, minerals, energy and finance, he said, without giving specific details. Xi will visit Mongolia on Aug. 21-22, the official Xinhua News Agency said Aug. 14.

Slowing Economy

Mongolia’s economy expanded 5.3 percent in the first-half, data last week showed, the weakest pace since 2010. As recently as 2011, Mongolia grew at a world-beating 17.5 percent, before slowing to 12.4 percent in 2012 and further to 11.7 percent last year. The currency, the tugrik, slumped 16 percent in the past year to a record low of 1,897.73 on Aug. 14 and inflation jumped to 14.9 percent as of the end of July. The nation’s foreign exchange reserves fell 58 percent year-on-year to $1.32 billion as at the end of June, Bank of Mongolia said this month.

Operations at Mongolia’s Tavan Tolgoi coal mine have been suspended amid a disagreement between state-owned coal miner Erdenes Tavan Tolgoi JSC and Australian contractor Macmahon Holdings Ltd., Macmahon said today. Tavan Tolgoi is Mongolia’s largest coking coal deposit.

Potential Risks

Still, agreements with China and Russia may hold risks including less transparency than dealing with western investors, Dale Choi, head of Independent Mongolian Metals & Mining Research, said in an Aug. 13 note to clients. Mongolia might sell key parts of its assets at the bottom of the cycle and move away from transparent free markets, he said.

“The risk is that the ‘third-neighbor policy’, a cornerstone of Mongolia’s independence, will be weakened or even abandoned, that the country’s future is mortgaged to solve short-range problems,” said NovaTerra’s Morrow by e-mail on Aug. 13.

There’s also Mongolia’s uneasy cultural relationship with China, with both countries at different times a conqueror and a vassal of the other.

Seeking Resources

China is scouring the globe for resources from natural gas to food to meet domestic demand. Xi’s Mongolia trip comes about two years after the country blocked an attempt by Aluminum Corp. of China Ltd. to take control of Mongolian miner SouthGobi Resources Ltd.

China’s thirst for power and alternatives to burning its own coal because of environmental concerns, make Mongolia and its vast reserves of the fuel a logical replacement, Chuluunbat Ochirbat, Mongolia’s Vice Minister for Economic Development, said July 23. The $400 billion natural gas supply deal Russia signed with China in May also offers Mongolia a chance to collect fees from transit pipelines, he said. Russia’s Putin is expected to visit the nation in early September, Chuluunbat said last month. A date for Putin’s visit hasn’t yet been set, according to the Ministry of Foreign Affairs in Ulaanbaatar.

“Russia has the ability to re-engage Mongolia economically very quickly,” said Nick Cousyn, chief operating officer of Ulaanbaatar-based brokerage BDSec. “China on the other hand, can bring investment to Mongolia on a scale unequaled globally.”

To contact the reporters on this story: Michael Kohn in Ulaanbaatar at mkohn5@bloomberg.net; Yuriy Humber in Tokyo at yhumber@bloomberg.net

To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net Madelene Pearson, Rebecca Keenan

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