Mongolia Opts for Foreign Investment as Foreign Investors Jailed

When Mongolia Prime Minister Saikhanbileg Chimed took office in November, he said his first three priorities were the economy, the economy and the economy.

About three months on and the 47-year-old, whose hobby is weightlifting, is finding one obstacle to attracting the foreign investment needed to drive economic growth may be the resource-rich nation’s judicial system.

Beside trying to resolve conflicts that have stalled expansion of the country’s single biggest investment -- a $6.6 billion copper and gold mine operated by Rio Tinto Group -- he’s trying to get long-delayed talks moving on a $4 billion coal mine in the Gobi Desert.

Both projects have been held up by disputes over how much of the profit will go to the overseas companies that develop them. The problem for Saikhanbileg is without foreign cash most of the copper, gold and coal will stay in the ground.

Mongolia’s mineral wealth attracted scores of companies in the past two decades as it opened up to investment. The reason was simple enough -- the vast deposits of copper, coal and iron ore were in a country bordering China, the world’s biggest buyer of the minerals.

The enthusiasm peaked in 2011 when land-locked Mongolia’s economy grew 17 percent or the fastest pace on the planet. It’s been downhill since.

Tugrik Drops

Mongolia’s currency, the tugrik, has fallen 30 percent against the dollar over the past two years, while foreign investment plunged more than 85 percent in the same period. The result was economic growth slowed to around 7 percent in 2014.

The situation is dire enough for Saikhanbileg to seek help this week from the International Monetary Fund. How much the IMF can do, will depend on developments at Rio’s Oyu Tolgoi mine and the Tavan Tolgoi coal deposit, according to Nick Cousyn, the chief operating officer for BDSec, Mongolia’s largest brokerage.

As the projects Saikhanbileg is trying to unlock mostly include foreigners and their money, his efforts weren’t helped when courts in the capital Ulaanbaatar imprisoned three overseas businessmen on Jan. 30 for between five and six years on tax evasion charges.

Two of the men, Hilarion Cajucom and Cristobal David, are Philippine citizens, the other, Justin Kapla, is American, prompting a comment from U.S. Ambassador to Mongolia, Piper Anne Wind Campbell.

Sends ‘Shockwaves’

Citing talks with the business community, she said the cases are “negatively impacting” the assessment of international firms’ ability to operate in Mongolia.

All three men and their former employer, Canadian miner SouthGobi Resources Ltd. deny the charges and have said they will appeal. SouthGobi, who’s largest shareholder is Rio Tinto unit Turquoise Hill Resources Ltd., was fined 35 billion tugrik ($18 million).

There is “simply no evidence” to support the verdict and SouthGobi will appeal, said Bertrand Troiano, the company’s chief financial officer, by e-mail. He added that the ruling could bankrupt the company.

The court’s decision sent “shockwaves” across the business community and added “a fresh layer of uncertainty” to Mongolia, he said.

A day before the court ruling, Prime Minister Saikhanbileg went on national television and asked the country’s 3 million people what they wanted: prosperity or austerity?

Investment Favored

Translated the question was really a referendum on foreign investment. He gave viewers a government phone number and four days through Feb. 2 to text a response.

Saikhanbileg got his answer when 56 percent of respondents favored development of mining projects and foreign investment, according to results announced Feb 4.

While the people had spoken, so had the courts in locking up the three former SouthGobi employees. After the court ruling, the American Chamber of Commerce in the country called for a suspension of talks to deliver economic aid to Mongolia.

Steve Saunders, President of the North America-Mongolia Business Council said the verdict could cast a pall over relations with the U.S.

“The SouthGobi case could snowball into a much larger problem, deflecting attention away from other major issues of importance to Mongolia and potential investors,” he wrote in a letter to members dated today.

Blame Communism

Bilguun Ankhbayar, the CEO of Mongolia Investment Banking Group LLC, said the country’s legal system is a mess and he blames a legacy of communist rule that ended with the collapse of the Soviet Union and then open elections in 1992.

“I believe this decision against Mr. Kapla is a consequence of a very messed up judicial and legal system,” said Bilguun. “This system of penalizing the executives of a company has been in a continuation of the communist-style legal system.”

Bayartsetseg Jigmiddash, State Secretary at the Ministry of Justice, didn’t answer calls requesting comment on the judicial system.

Still, foreigners do have a PR problem in Mongolia as they are portrayed in some media not as investors, but invaders bent on pillaging the country’s mineral wealth.

“The underlying goal of this verdict is about sending a message to international investors that if you want to do business with us you have to play by our rules,” said Munkhdul Badral, head of market intelligence firm Cover Mongolia,

But the verdict will hamper Saikhanbileg’s pro-investment agenda, Munkhdul said.

“Never mind whether foreign capital can succeed here or not, but if a foreigner can’t feel safe doing business here, we might as well close off the country to the entire world,”

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