July 5 (Bloomberg) -- Mongolia has a China complex.
Some 800 years after Genghis Khan forged its tribes into the world’s largest empire, Mongolians are awakening to lucrative -- and unsettling -- realities.
Lying beneath Mongolia’s storied lands are an estimated $1.3 trillion in mineral resources that could redraw global commodity maps, denting Australia’s coal, Brazil’s iron ore and Chile’s copper exports. A nation whose cultural icon remains the nomadic herder could become the next Kuwait and Qatar, examples of lightly populated countries grown luxuriously rich on the world’s thirst for commodities.
A week-long reporting swing through boomtowns and border crossings and interviews with dozens of Mongolians from coal moguls to dairy herders shows a nation torn -- between the lure of prosperity and feared degradations of development; between traditional ways and a booming economy that threatens to change Mongolia’s cultural face; and, not least, between distrust of and a need for China, its biggest trading partner.
Consider the anxieties of Nyama Tegsjargal, a one-woman diaper monopoly who has grown comfortably wealthy trading Chinese-made baby goods in Dalanzadgad, a windswept town of 20,000 rising out of the disorienting vastness of Mongolia’s southern Gobi Desert.
In a country of about 3 million people where almost 30 percent of citizens still reside below the World Bank’s poverty line, Dalanzadgad is thriving off Mongolia’s China trade, with billions having poured into development of the nearby gargantuan Tavan Tolgoi coal basin to the east and the Oyu Tolgoi copper field to the southeast.
Price of Prosperity
A provincial capital 120 miles (190 kilometers) north of the China border, Dalanzadgad once drowsed along on a two season economy when herders sheared goats and sold cashmere in spring and slaughtered animals for meat in autumn. Now it has taxi service, a shopping mall and a burgeoning merchant class. Disposable diapers, three years ago a luxury item, have become a “daily essential,” Tegsjargal said. She has opened two shops, built a two-story house and drives a late model SUV.
And yet she frets about the reliability and motives of the very country that is making her prosperous. The Chinese in general maintain “chauvinistic” attitudes toward Mongolians, she said as she cut up lengths of blood sausages to serve to guests. Moreover, “you just don’t know if there will be an epidemic outbreak or China will shut the border” because of recent economic tensions with Mongolia, according to Tegsjargal, a mother of three.
World Leading Growth
The core of Mongolia’s unease is a pervasive sense that China sees Mongolia as little more than a than a vast open-pit mine to feed its growth ambitions and the consumerist desires of China’s 1.3 billion people -- this, coupled with a wariness that the mining companies that have come to suck up these resources mostly on China’s behalf will leave behind an environmental mess.
The upside of development is unquestionable. The commodities bonanza propelled the nation to a world-leading 17.5 percent growth rate in 2011 and a respectable 12.3 percent last year. Yet for all that, “Mongolian attitudes toward China remain negative,” said Jack Weatherford, best-selling author of “Genghis Khan and the Making of the Modern World,” who spends about half of his time in Mongolia.
That may be because Mongolians are also keenly aware that not all of their riches are buried beneath the land. The country, said Davaa Gala, the Mongolian-born conservation director of the Arlington, Virginia-based Nature Conservancy, is home to some of the most pristine deserts on earth.
Herds on the Steppes
Herds of Mongolian gazelles numbering as many as 250,000 animals still roam the steppes, even as 24-hour coal convoys -- bumper-to-bumper lines of 100-ton trucks grinding across the dusty plain -- cross and trample ancient migration paths used by gazelles and nomadic herders alike.
Last year, in consultation with the Conservancy, the government put aside 3.7 million-acres (1.5 million hectares) of protected areas, including a single 865,000-acre tract on its fragile Eastern Steppes. Still, that’s a pittance of Mongolia’s 600,000 square miles of which 16 percent is already leased to mining and other interests and another 26 percent has been designated for future development, according to Nature Conservancy data.
Gala, who grew up in a herder family in western Mongolia, applauds the conservation efforts. The stakes in all this are enormous. “If we don’t manage all this change our culture will be lost, our environment will be lost. And the future generation will pay the cost,” he said.
Awash in Coal
The Coal Rush is an example.
Mongolia is awash in coal. The Tavan Tolgoi basin alone is thought to hold 6.4 billion metric tons. China wants and needs that coal and some Mongolian entrepreneurs see opportunity to deliver it.
One result is Jambaljamts Odjargal’s high-speed coal highway. The other is the Tsagaan Khad coal station and the blight upon the land that it is creating.
As seen from the seat of a speeding Toyota Landcruiser about 12 miles from the China border, the coal station rises up, black mounds against a parched blue sky. It’s the surrounding landscape that environmentally-concerned Mongolians like Gala have come to decry -- a vast swath of coal-dust-cloaked desert blasted by winds whipping clouds of dark ash into the air. Pollution had grown so bad, in fact, that the government last week decided to shut down Tsagaan Khad.
The road is something else, a 159-mile straight-arrow ribbon of mostly smooth asphalt that streaks from Odjargal’s Tavan Tolgoi coal operation to Tsagaan Khad. There, most Mongolian trucks dump their loads and Chinese trucks pick them up, hauling the fuel to the Gashuunsuukhait border point and into China.
Paved With Frustration
Odjargal’s road is paved in part with frustration. Astonishing as it may seem, Mongolia, until two years ago had no paved roads to China -- another sign of wariness toward its largest trading partner.
Many new roads are on the drawing board yet the pace of building has been slow. Mongolia is backing a private group’s plans to build a $3.5 billion north-south toll road that would stretch 617-miles from the Russian border to China. The government also has pledged another $5 billion for 5,000-mile expansion of the nation’s highway system over the next decade.
The Chinese have expectations. By Mongolian government estimates, they have plowed at least $3.6 billion into Mongolia mining and other ventures in the past two decades. In 2011, China accounted for almost 86 percent of the nation’s $4.8 billion in exports and about 43 percent of its $6.6 billion in imports, according to U.S. government figures.
Road to Riches
Tired of waiting on government roads, the media-shy Odjargal and his Mongolian Mining Corp. decided to pave their own way to their Chinese clients. Opened in October 2011 at a cost of about $150 million, the highway -- for Odjargal at least -- is a literal road to riches since he has become among the nation’s wealthiest people.
The road has paid more than economic dividends. MMC is Tavan Tolgoi’s largest operator and moving its trucks onto the highway has cut down traffic carving up the desert on impromptu roads while improving fuel efficiency and reducing dust, pollution and accidents.
It’s also sped up MMC’s volume. The company shipped 5.6 million tons of coal products last year, about double that of its two main rivals, and mostly to China. “If there is an accident or breakdown it can take three days to get to the Chinese border on a dirt track, but you can do a return trip in less than one on the paved road,” Suren Toroo, an entrepreneur who set up a trucking firm in the area three years ago, said.
Stuck in Ruts
The rub is that MMC charges its rivals the equivalent of $280 a trip to use its road and most decline to pay it. So the desert continues to be abused -- and drivers stuck on dirt tracks tell tales of constant woe.
Adiyabazar Nyambayar, who drives for a Chinese transport company, is one of them. Over a lunch of thick fried noodles and mutton at a makeshift roadside diner serving the trucking trade, he said his life is one of little sleep, constant flat tires, overturned trucks, and months on end without seeing his wife in Ulaanbaatar, the capital 390 miles away.
He makes eight return trips to China every four weeks and only one thing keeps him on the coal road -- in 30 more trips, he’ll own his leased truck. After that he’s quitting, diverting his truck to routes that take him closer to home.
In his job, Nyambayar spends a lot of time with the Chinese. In a reflection that attitudes may be moderating, he said, “The Chinese are OK.” He often has his truck repaired south of the border. “You pick up a few words. Gestures work.”
Angling for Detour
For Gala, this is part of the way forward. “More interaction between the people of China and of Mongolia will definitely help to improve trade, improve personal relations,” he says.
While businessmen like coal magnate Odjargal see new roads and rail to China as the fastest path to Mongolia’s mineral trade, ex-Wall Street banker Chuluunkhuu Ganbat wants those minerals to take a detour.
“Mongolia should not become a commodity appendage of China,” said the tall, broad-shouldered Ganbat in an interview in the conference room of his central Ulaanbaatar office.
Ganbat returned from the U.S. four years ago to help make Mongolia more than an appendage. Now his firm Liberty Partners is charged by the government to bring together business, investors, engineers and politicians to erect a $10 billion industrial hub in the middle of the desert, 280 miles southeast of Ganbat’s office.
The location is Sainshand, an eastern Gobi town of 20,000 that nonetheless boasts Mongolia’s first public fountain outside the capital. Sainshand is enjoying a tourism revival as hordes of pilgrims pass through on the way to a newly restored nearby Buddhist monastery.
If Ganbat’s 10-year plan for Sainshand comes to fruition, the town will become a booming industrial hub that will include coal-coking plants, a copper smelter and factories to make clothes, iron pellets and cement. This, he says, is far more lucrative for Mongolia than simply gouging out raw materials and hauling them to China.
For the pleasure of hosting the manufacturing hub, Sainshand has offered its dump site on the edge of the town. The garbage is in the process of being moved.
The town’s biggest selling point is its location as the penultimate stop of the Trans-Mongolia Railway before it reaches the China border. The success of this plan depends on upgrading and expanding Mongolia’s rail system to feed the complex, which the government -- with its ever-wary eye on China -- is planning to do. The sticking point is what rail standard to adopt.
Mongolia’s current rail system, spanning about 1,100 miles, was built by Soviet engineers in the last century to ship Mongolian goods to Moscow long before China awakened as an industrial power. As such, Mongolia adopted the Russian rail standard. Chinese trains, in contrast, run on so-called standard gauge tracks used throughout most of the rest of the world -- meaning they are 85 millimeters (3.3 inches) narrower.
In 2010, the government resolved to build all new tracks using the Soviet standard. So while a northbound train from Mongolia can pass seamlessly into Russia -- with which Mongolia now has little trade save gasoline imports -- it wouldn’t be able to move along the tracks of Mongolia’s best customer.
Mongolian coal shippers fear that having to offload Mongolian coal cargoes onto Chinese trains could add $3 a ton to their costs, driving China to markets in Russia or Australia. While the Mongolian government is said to be reconsidering its decision, Yaichil Batsuuri, CEO of the country’s largest state-run mining company, Erdenes TT, prefers not discuss it at all. “This is a political issue,” he said in an interview.
In the world of Mongolian politics, a seamless rail line to China is seen as a risk. Mongolians have long memories and a keen sense of history, according to Weatherford, noting that Inner Mongolia, a vast, dragon shaped swath of land on their southern and eastern flank, now belongs to China. Mongolians have long feared that they would suffer the same fate as Tibet - - be invaded and absorbed by China.
“The general attitude in Mongolia has been for many years that as soon as the Chinese take back Macau, Hong Kong, and then Taiwan, they will come for us,” said Weatherford. “Recent Chinese statements about the various islands in the surrounding sea only increase the suspicion.”
He added: “The Mongolians recognize that the railway would not slow the Chinese. It’s the symbolism that matters.”
For ordinary Mongolians, the rewards of trading with China, even if lucrative, don’t come without struggle.
At 7:10 a.m. on a recent day, the sun golden on the surrounding desert, Zamyn-Uud, a rail and truck stop on the China border, pulses to life. The occasion: the arrival of the Ulaanbaatar overnight train.
Twenty six grass-green wagons clank to a halt and Mongolians from all over the country jump from the train and race past the station building and central square into an adjacent car park. Wind gusts strong enough to topple wheelbarrows are sandblasting the tea-sellers on the platform.
The racers seem oblivious, sprinting like inmates sprung from prison toward an awaiting phalanx of taxis, cars, Jeeps, minivans, buses and motorbikes, all with engines revving. The rule is simple: agile traders who can find instant rides to the border crossing a mile and a quarter away will be first into Erenhot, a Chinese outpost that has grown from 8,000 people to close to 100,0000 in 20 years based on trade with Mongolia. Those who don’t will find themselves at the back of a tediously slow, mile-long queue.
Two middle-age women wade into the fray, waved by a driver into his dilapidated Soviet-era UAZ-469 truck already brimming with traders sitting on their bags. This is impromptu demolition derby -- drivers gunning engines and roaring for the border, favoring the horn way more than the brake. Fares for this frenzied journey can run to 80 Yuan ($13) The fare falls to $3.25 for slackers at the end of the line.
At the crossing itself, organized anarchy seems to be the spirit. A penny wouldn’t fit between the bumpers of the vehicles in line. Drivers lean from their cars, cursing each other with clenched fists. Smashed headlights, dented fenders, chassis as crumpled as foil wrappers -- all are trademarks of Zamyn-Uud vehicles.
Trucks bearing Chinese goods for Mongolia, notably cement and food, use this crossing, too; in fact, close to 70 percent of all Chinese imports to Mongolia go through this station. In return Mongolia sends iron ore, potash fertilizer, coal, and animal products, as well as aluminum cans and plastic bottles for recycling.
Before this day is over, some 500 cars and close to 200 trucks will cross the border here, a number that can approach 1,000 on a peak day, says Demberel Zorig, 46, senior inspector of State Customs.
A paunchy man who constantly fiddles with his iPhone, Zorig says the border post is barely coping with the flows as is, never mind that his operation is also charged with stopping the flow of contraband that includes “white powder” favored by Mongolian hip-hop artists and marmot pelts smuggled by hunters.
Now there’s talk of that $3.5 billion state-backed toll road running from the Russian border to Zorig’s crossing.
At that point, “It’s clear we’ll need to go to 24-hours and increase staff,” he said.
As to Gala’s concerns -- whether unbridled development can coexist with Mongolia’s traditional ways -- the answer for some is simply to upgrade the traditional ways.
The road north from Zamyn-Uud is emblematic of what Mongolians do in the absence of real roads. They make their own. A two hour drive, along ruts and mounds of a 50-meter-wide (160-foot-wide) track snaking through the desert, brings you to the summer home of Bazaar Ganbat and his wife, Luvsangomb Byambasuren. It’s a ger -- the rounded, felt-covered movable tent that serves as home for the nomad.
The couple is a modern incarnation of nomadic herders. Both university educated, they own a truck, a motorbike, satellite television and a radio phone to chat with relatives in Washington D.C. and Los Angeles.
“A bank account? Sure, we have one,” said Ganbat.
“We can even wire money to Ulaanbaatar over the mobile phone nowadays,” chipped in Byambasuren as she churned tea in a large wok on a dung-fired stove.
They don’t consider their prosperity all that unusual. Almost all families living in gers these days have electric lighting and a TV, at least one motorbike and a car, they said.
“Life is getting better,” Ganbat said as his wife cheerfully offered curd sweets and salty milk tea to visitors.
Which isn’t the same as saying the nomadic life is easy.
The couple has been up since 6:30 a.m., the requisite time for milking their 12 cows. While their sheep and goat herds have grown to 700 head -- they are principally in the business of producing dairy products -- they have had to bring in relatives to help them manage them all.
Traffic dust is a chronic issue since the yogurts, clotted cream, milk, dry curd and butter they produce for sale require rigid sanitation. Weather is a constant struggle. Winter nights of minus 25 F are common and the heat can climb to 105 F in the summer. Frequent dust storms are a hazard of the spring months.
One such storm is brewing outside now. A desert landscape that resembles a series of golden, mogul-laced ski runs will soon be obliterated from vision.
Still, Ganbat and Byambasuren like this life. The truckers who ply this informal route aren’t only good customers for their products -- they also make a popular milk-based vodka -- but have become friends. “Their kids already ask them when they’ll drive by us next,” Byambasuren said.
Meanwhile, business is brisk. Dairy orders from Zamyn-Uud and Sainshand have never been better, Ganbat says, and the couple is even considering opening a shop in one of the local towns. Plans are also afoot by the government to pave the rutted track that runs a few hundred yards from their ger.
“When the road comes it will increase sales and help move goods faster and further,” Ganbat said, adding that the paved road is due to be fitted with special tunnels to allow animals such as sheep and goats to cross to pastures on the other side.
And cows? “Cows don’t need to cross the road,” Ganbat quips.
When another gale-force gust rattled the ger and sand whipped violently against the tent’s felt walls, Ganbat pulled down on his Jeep-brand-emblazed cap and turned to the door. Outside, a chrome-color fog had cut visibility to less than five meters.
Ganbat and his wife headed out into the growing gloom to herd their cows to a more sheltered part of their free-range pasture.
The 136 mile road from Sainshand to Choir is a start-stop construction project, now mostly dirt but rapidly transforming into a modern two-lane asphalt highway. On a stretch outside of Choir (pronounced Choi-yer), a Chinese work crew steamrolls a section to create an embankment that allows for the placements of culverts under the road.
The purpose? Wildlife crossings meant to allow unhindered roaming of rare fauna such as black-tailed gazelle, Mongolian gazelle and wild ass.
“Previously people would be very happy if a road was paved,” said Sanjaasuren Oyun, the country’s minister of Nature and Green Development in an interview. “Now we say the road is good but please also put the crossings for wild animals.”
Cold War Legacy
Choir has a sinister Cold War history. Home to the largest Soviet airbase in Mongolia, it was where the Soviets pointed some of their mid-range missiles toward targets in China. While it remains one of the poorest parts of the country, the new highway is bringing visible change. Seven gas stations have cropped up in a 1.25 mile stretch where the road bypasses the town.
“More businesses will come,” said Yura Munkhbayar, a 47-year-old freelance driver who shuttles mining company engineers to work sites around the Gobi.
Drivers like Munkhbayar appreciate government efforts to add roads and help wildlife at the same time. What worries him is that many of the road contracts are falling to Chinese firms -- though he admits they often do a better job.
If the Chinese build all the roads, Munkhbayar reasoned, “all the money will flow out to China.”
This isn’t merely a provincial concern. Last year, a move by state-owned Aluminum Corp. of China Ltd. to take over SouthGobi Resources Ltd. caused such a public backlash in Mongolia that the Chinese producer abandoned its efforts. The deal spurred Mongolia to pass a law that bars foreign state-controlled entities from buying control of local companies in resources, finances and telecommunications industries without parliamentary approval.
Even the gasoline produced in China with Mongolian crude that went on sale in the capital Ulaanbaatar in May is labeled “Mongol-93” to cloak its Chinese manufacture.
Mongolian leaders tend to brush such episodes aside as misplaced anxieties. “It’s inevitable that we will be partners with our neighbors,” said Luvsanvandan Bold, Mongolia’s foreign minister in an interview after the Aluminum Corp. episode. Such controversies “should not damage relations,” he said.
The Chinese view is that Mongolian disaffection largely stems from the fact that not enough ordinary citizens have yet shared in the resource boom.
“As long as China pays competitive prices, there’s no reason Mongolia shouldn’t treat China as its top export market,” said Lin Boqiang, director of China’s Xiamen University’s Center for Energy Economics Research in an interview. “Both countries can offer something the other side desperately needs, so I can’t see any reason why the two can’t get along well in the long term.”
Tsagaankhuu Olonbayar is on board with that. Well, if the price is right. “There are so many Chinese in the town they aren’t even foreigners anymore,” he said.
Olonbayar is a stout man in fatigues and a t-shirt, dragging on a cigarette when he’s not stroking his Vito Corleone mustache. A heavy steel chain dangles from his neck. Signet rings decorate the middle fingers of both hands.
The Chinese bring his town of Tsogtsetii opportunities, says Olonbayar, seated in a hotel restaurant -- owned by his sister -- where the bar features Pringles potato chips, German chocolates and Arkhin, a local premium vodka.
Tsogtsetii, about 9 miles from the giant Tavan Tolgoi coal basin, is in the hot arc of the Coal Rush, tripling its population in the past three years as Chinese and others move in to work the mines, open sauna, massage parlors, and karaoke bars and venture into businesses from trading to restaurants. Olonbayar, who came here as a 12-year-old with his 15 siblings, has been able to double rents from last year on his four ger tents to 800,000 tugriks ($560) a month.
Tsogtsetii may prove to be more than a mere boomtown -- it may be a sign that Mongolians, coming to an understanding of their unexploited riches, are learning about the leverage they have.
“People are pretty tolerant here,” Olonbayar said. “The Chinese come in and do what they need to do.”
It helps, of course, if they have a guide.
Olonbayar, you see, is a man with a reputation for helping to facilitate this transnational commerce. It’s no secret that Mongolian gangs roam this scrape of desert. Olonbayar, who mentions the fact that he’s spent half his life in jail, said he’s in a position to make sure that the Chinese and other non-local firms and the gangs get along.
An example: “There’s this businessman who made money in Zamyn-Uud and he wants to set up in coal trucking here,” explained Olonbayar. “He asked me to come in, make sure his drivers can load the trucks at the pits without running into problems.”
He wouldn’t say what such services cost but in the new Mongolia, “we call it mine guiding.”
To contact the editor responsible for this story: Timothy Coulter at email@example.com