Wary of Chinese Intentions, Mongolia Opts For More Expensive Rail Development Plan

As they ponder ways to develop Mongolia’s abundant natural resources, political leaders in Ulaanbaatar are opting for more expensive infrastructure options in order to bolster the country’s sovereignty.

The leadership’s sovereignty concerns were evident in the recent announcement that a railroad spur leading from the country's largest coal mine would link into the country’s domestic railroad network, rather than go directly to China. If completed as currently planned, the spur would go against the advice of international financial institutions that say the Chinese route would be far cheaper. Mongolian officials have emphasized that the domestic route would better protect Ulaanbaatar from possible Chinese economic and political pressure.

The Tavan Tolgoi coking coal deposit is estimated to have more than 6 billion tons of coal and has attracted interest from many of the top international mining companies, including China's Shenhua Energy, a Russian consortium led by Gazprom, and Australia's BHP Billiton. The deposit sits below the Gobi Desert in far southern Mongolia, just 200 km from the Chinese border. Most of the coal from the deposit, once it is eventually mined, could end up being sold to China.

The company that now owns Tavan Tolgoi, Energy Resources LLC, had been working with the German state-owned railway Deutsche Bahn AG, to build a railroad southward, to connect with the Chinese rail network. But that plan ran into resistance from Mongolia's political leaders, who feared that too great an economic dependence on China could leave them with less policy-making room for maneuver down the road. China controlled Mongolia for more than 200 years, ending with the collapse of the Manchu dynasty in 1911, and many Mongolians today remain deeply distrustful of China's intentions toward their country.

The planned rail route, approved by Mongolia's parliament, would stretch 1,100 km to the Russian border. The railroad would use the wide gauge that is present throughout the former Soviet Union, rather than the narrower gauge that is used in China and many other parts of the world. “The policy will greatly boost the economic development of Mongolia. Instead of shipping raw materials directly to one market, jobs and value-added production will be created in Mongolia,” said Transportation Minister Battulga Khaltmaa.

The rail line is part of a large complex of industrial enterprises set to emerge in southern Mongolia in the coming years. Last year, Mongolia signed a contract with Ivanhoe and Rio Tinto to develop Oyu Tolgoi, expected to be the largest copper-gold mine in the world. [For background see EurasiaNet’s archive].
And the government is planning a $10 billion industrial complex in the southern city of Sainshand, to include a copper smelter, oil refinery, power plants and chemical coking facilities to process the output from both the coal and copper-gold mines.

Several factors went into determining the Tavan Tolgoi railroad route, Dashbaljir Nemekhbayar, head of the Transportation Ministry's Finance and Investment Department, told EurasiaNet. The primary concern, Nemekhbayar indicated, is the government desire to encourage the development of the Sainshand industrial complex. The planned route would take coal from Tavan Tolgoi to Sainshand.

But Mongolia also didn't want to become too dependent on China, he said, pointing out that in 2002, when the Dalai Lama visited Mongolia, China expressed its displeasure by closing the border. “Who knows, they could do that any time,” Nemekhbayar said. Mongolia also hopes to sell some of the coal to South Korea, with which it has close ties, and Japan. And the route through Russia would make more sense for exports to those countries, Nemekhbayar said.

Russia also played a key role in the decision, Nemekhbayar added. Russia, as a legacy of the former Soviet control over communist Mongolia, currently has a roughly 50-percent stake in the Mongolian state rail company, Ulaanbaatar Railway. “There may have been some pressure from Russia,” Nemekhbayar said, noting that both Russian President Dmirty Medvedev and Prime Minister Vladimir Putin visited Mongolia last year. Russia also has offered to pay for part of the construction of the new rail line.

In addition to the desire to build up its own industrial capacity, Mongolia finds Russia to be a more comfortable partner to work with than China, said Alicia Campi, president of the US-Mongolia Advisory Group. China and Mongolia held talks in May and discussed complaints that Mongolian rail exports were regularly being held up on Chinese railways, in favor of Chinese freight. And those talks “did not result in any concessions to the Mongolians, nor assuage their concerns over such transportation delays,” Campi said.

“The Russians, partners since 1949 in Mongolia's north-south border-to-border sole railway, are a known, basically reliable commodity to Mongolian policymakers and they share Mongolian concern over rapidly increasing Chinese penetration and monopolization of north Asian economic trade,” Campi continued. “While it's conceivable that some under the table deals were offerred by the Russians to influence the decision, all in all, the Mongolian decision was not all that agonizing.”

Soon, the government will open a tender on construction of the rail line, and “most likely it will be a Chinese contractor,” Nemekhbayar said, noting that Chinese compnies have the most regional experience and offer low costs. While the government has said the railroad will be constructed within two years, Nemekhbayar said it is more likely to take three or four years.

Editor's note: Joshua Kucera is a Washington, DC,-based freelance writer who specializes in security issues in Central Asia, the Caucasus and the Middle East.