Mongolia: Between a Rock and a Hard Place

Given Mongolia’s potential to become a future commodity powerhouse, it does not seem strange that recent legislation that aims to cap foreign investment and ownership was a cause for concern among the domestic and global business community. The Strategic Foreign Investment Law aims to confront two major challenges to Mongolia’s social and economic development. Firstly, the regime has to respond to domestic demands that resource wealth is used to benefit the wider population. Moreover, Mongolia also seeks to reduce its dependence on its two powerful neighbors and in particular to limit Chinese influence over its economy. Neither of these dilemmas will be easily resolved.

After intense domestic lobbying, the Mongolian Parliament approved a watered-down version of the Strategic Foreign Investment Law on 17 May. Initially, the law stipulated that foreign investors seeking to buy a stake of more than 49% in Mongolian companies required the approval of Mongolia’s Foreign Investment and Foreign Trade Agency (Fifta) and Parliament. However, following amendments aimed at appeasing foreign investors, the conditions only apply to companies involved in Mongolia’s ‘strategically important’ mining, financial, and media and telecommunications sectors and when deals are valued at above $76 million. Yet deals in which the buyer company is even partially in state ownership will require approval regardless of the sector of the business.

Significantly, the law comes ahead of parliamentary elections to be held on 28 June. Accordingly, the legislation can be seen as a measure to satisfy populist elements and resource-nationalist demands. Yet actions that upset the global investor community could be harmful to Mongolia’s economic aspirations. The country is dependent on foreign capital, lacks human resources and technical expertise and, crucially, access to sea ports necessary for exploiting its mineral wealth. Yet Mongolia also has a history of quickly introducing legislation and then repealing it after it has adversely affected the domestic economy. Indeed, given that the country’s political and economic elites largely overlap this may prove to be another piece of legislation that disappears after the upcoming elections.

However, for the time being the law can be seen as part of Mongolia’s efforts to limit foreign – and in particular Chinese – ownership. The legislation was triggered by Canada’s Ivanhoe Mines’ plan to sell its 58% stake in SouthGobi Resources to the Aluminum Corporation of China (Chalco). This further reflects widespread concerns about the growing Chinese influence within Mongolia. While China has been Mongolia’s largest trading partner since 2005 (not to mention foreign investor), anti-Chinese sentiment appear to be on the rise as a result of the influx of Chinese businessmen and migrant workers.

Sandwiched between China and Russia, Mongolia has long faced the dilemma of which neighbor to look to for economic and political support. However, since the fall of the Communist regime, Mongolia has pursued a ‘third neighbor’ policy that aims diversify its investment and trade relations beyond China and Russia. Since then, Mongolia has boosted ties with the United States, Canada, the European Union (Germany and the UK in particular) as well as South Korea and Japan. Beyond the economic realm, Mongolia has also contributed to UN peacekeeping missions, deployed troops to Iraq, and conducted joint military exercises with a host of states. In May 2012, Mongolia attended the 2012 NATO summit in Chicago under auspices of the Individual and Cooperation Program.

Mongolia also participates in regional initiatives such as the ASEAN Regional Forum. The country also holds observer status within the Shanghai Cooperation Organization (SCO) and is actively seeking membership of organizations like the Asia-Pacific Economic Cooperation (APEC). Yet regional initiatives or cooperation with NATO do not provide Mongolia with any concrete security guarantees. Regional cooperation across East Asia – which is mainly focused on the economic realm – does not in its current form alter the balance of power politics still dominant in the region’s security dynamics. And while globalization may diminish the significance of physical distance, Northeast Asia’s economic and security dynamics ensure that Ulan Bator needs to maintain stable relations with its two powerful neighbors.

Indeed, Mongolia’s geostrategic location between both countries eliminates the chance to develop ‘third neighbor’ policies in certain instances. In 2010, for example, Mongolia had only two options in terms of connecting its railway infrastructure to wider rail networks. And while Mongolia eventually chose Russia, Sino-Russian competition for the economically important railway link can be seen more broadly as a geo-economic contest for influence in Mongolia. Consequently Mongolia can neither fully escape its regional position nor conduct ‘third neighbor’ policies that risk relations with China and Russia. Rather, the policy of diversifying relations can be understood as an attempt to gain additional leverage the relations to Russia and China.

In an age of diminishing energy and natural resources, Mongolia’s vast reserves of coal and minerals mean that the country is likely to become a focus of global economic and security interests. This makes the dilemmas confronting Mongolia all the more challenging. An abundance of natural resources are likely to make Mongolia the site for further foreign investment. As a result, domestic debate over the control and distribution of resource wealth is likely to intensify as more foreign companies seek to invest in the country. So despite a recent upsurge in anti-Chinese sentiment, Beijing may not be the only ‘outside’ actor that causes concern regarding foreign ownership of Mongolian enterprises.

For further information on the topic, please view the following publications from our partners:

Resource Management and Transition in Central Asia, Azerbaijan, and Mongolia

Developing US-Mongolian Relations

Human Development Report 2011: Mongolia – From Vulnerability to Sustainability: Environment and Human Development