Wednesday, August 6, 2014

Mongolian Image problem

Mongolia, if you look at the numbers, has a large percentage of its citizens still living in poverty, but to look at things while in the capital city of Ulaan Baatar, one certainly wouldn’t think so. Living in “UB” (as it’s known), you get an entirely different impression than what might be technically true of the entire country. Most people you see are either middle class, or even rich – driving around in Hummers, or exotic sports cars, and wearing designer clothing and dark, stylish sunglasses. Of course, you still see a healthy amount of homeless drunks, but most of the city’s “poor” live outside of the city center in what are called “The Ger Districts”.

And as impressive as it may be to see these former nomadic herders driving around the city center in such expensive vehicles and wearing designer clothing, Mongolia is however, suffering now from a severe International image problem. Last year at this time, Mongolia was an investor’s darling, and the international community was starting to read extremely encouraging things about the Mongolian economy, but that was last year. Now, investors and even tourists are staying away – in droves.

Having a bad public image is nothing new to Mongolia, as even the great Chinggis Khaan himself still suffers from a bad international image, but this time it’s being caused by recent actions and legislation by the recently dominant Democratic Mongolian government, which came to power last July 1st, headed by President Ts. Elbegdorj, and it’s beginning to have a catastrophic effect on the Mongolian economy.

Now before reading further, bear in mind that I will discuss both sides to the story, so expect a big “but” later in this article.

Now there’s a good reason for the bad public image – at least as far as potential investors are concerned. For one, most “news” coming out of Mongolia is whatever is reported by the China Daily, which is an extremely biased reporting agency when it comes to reporting Mongolian affairs. Yet for some reason, respected publications like the Wall Street Journal, the New York Times, CNN, and the BBC still consult this rag as their most significant source for news from Mongolia. But another reason is that indeed, times have been tough this past year for both foreign investors and businessmen alike, in Mongolia, especially in the months after the elections – until the present time.

To illustrate just how catastrophic the economic effect has been, and may well continue to be – if drastic measures are not put in place to stop it, in addition to mentioning the fact that Mongolia’s impressive GDP growth projections for the balance of 2012, and 2013, have actually plummeted from a whopping 17%, to a reality of a -.05%, I will also discuss the recent fates of some individual foreign investors, companies, and independent businessmen.

Obviously, the single biggest reason that has investors running away from Mongolia to more recently foreigner-friendly, and investment-friendly places like Myanmar, is what is happening with “negotiations” between the government and the Oyu Tolgoi mine, owned by Australian mining mega-giant, Rio Tinto. The O.T. mine (as it’s known), is perhaps the second largest copper deposit ever found in the world – not to mention the huge deposits of gold that’s there too, and the giant mine represents a huge chunk of the Mongolian annual GDP.

From the perspective of Rio Tinto (formerly managed by their Canadian leg, Ivanhoe), they believed they had a solid deal struck with the Mongolian government in late 2009. In fact, this deal was rumored to have been negotiated by then Russian President, now Prime Minister, Medvedev. And this deal called for a lot of front-loaded money from the mining company, into the coffers of the Mongolian government (and pockets of its politicians), with the government then agreeing to supply lots of infrastructure (mainly to build a railroad) in the future.

It’s not unusual for Mongolians (most formerly herders) to spite their future in favor of the here and now, and immediately, news of this deal made a positive impact on the overall economy of Mongolia, which subsequently started off the super-heated economy which culminated in the 17% growth as of June 2012 – and all this at a time when GDP’s in most of the rest of the world were experiencing a sharp slowdown.

I can still remember Medvedev’s visit. He was travelling in a motorcade, with no other cars permitted on the road, with police cars and official vehicles leading the way, and he, riding in a car bearing the Russian flag. It was a bit comical since if there really was anyone who wanted to do harm to the President, the Mongolian security may as well have painted a bulls-eye on the top of his car that read “aim weapon here”. But such is how it is in Mongolia. Really, this is the charm of it – that the people here really are still quite innocent in many ways.

But they’re certainly not known for being able to keep their end of an agreement.

And to that end, brings the current conflict and debate. From the side of the mining company, and the O.T. mine, the Mongolians are just being irresponsible and not willing now to honor their end of the agreement they signed in 2009. And certainly, this is also now the same opinion shared by the international investment and business community, and hence, the recent mass exodus of foreigners and foreign investment money. It took the mining company over 8 years to finally negotiate that deal, then only to have the government want to “renegotiate” when it came time for them to pay their share. And this sent out a loud and clear message to the world: “The Mongolian government cannot keep their word”. In fact, in March of this year, Rio Tinto enlisted the help of former British PM, Tony Blair to come to Mongolia and “mediate” in order to try to teach the Mongolians a lesson in how to respect a contract.

And it’s not just this contract the Mongolians are not respecting these days. An associate of mine had a contract to have his restaurant put in front of the Sky Department Store, which was put through by his long-time friend, the majority shareholder in Sky Holdings and Altai Holdings, and former PM Batbold, only to have Mr. Batbold, after losing in the elections, then decide to sell out much of his Mongolian holdings and name a new GM of the Sky department store, who in turn, did not like the look of James’ restaurant, and immediately decided to renege on their contract. This after James had invested almost $150,000 of his own money in the project, only to have to close the restaurant shortly after it opened.

Then there has been other decidedly anti-foreigner legislation, such as the recent law requiring all foreign attorneys to be fluent in Mongolian and pass the equivalent of a Mongolian Bar exam in order to practice law there. According to Russell Murphy of Harris Moure associates, who, along with most other foreign attorneys, had to close up shop, “This is not unlike what they do in any developed country. In America, a Washington State attorney can’t practice in another state, unless he passes the bar there. However, the government will not tell us their new requirements specifically, or issue a “test”, and their requirement to be fluent in Mongolian is just wholly unreasonable”. So without any foreign representation possible, and Mongolian concerns being favored in more than 95% of all litigated adjudications, foreign investors also now feel that they cannot have security, or fair representation to protect their interests in Mongolia, anymore – thus keeping yet more of them away.

And this mass exodus and wave of nationalism is also having a sharp effect of the tourism industry in Mongolia. I recently took a train from Zamyyn Uud, at the Chinese border, to the Capital city, which last year was so busy that scalpers were selling tickets at premium prices, which you had to buy, or else wait two days to buy a ticket from an agent. But this year, it’s June already, and that train was about half empty. And this is actually sort of a classic case study against even having a “democracy” in a country such as Mongolia. The Democratic Party of Mongolia is also one which is extremely Nationalistic, and this is how they were finally able to wrestle away the vote from the voters in the countryside, in the most recent election.

Democracy is not the perfect system by any means. Case in point, if you were charged with murder, and the jury was to be made up of all 10 year olds – would you still feel confident that they would be able to come up with a fair decision? If everyone who votes is ignorant (and Nationalistic, as is the case with Mongolia), then prudent results might not be possible.

The founding fathers of America were concerned about this issue, and initially declared that to be able to vote – you needed to be an educated land-owner. And in India, Democracy certainly seems to be failing for basically these same reasons.

Then there is additional legislation to go along with a renewed sense of “Nationalism” which is helping to drive away foreign concerns. According to Will of Hancock Prospecting, “The way the new law is written, even after we buy the mine, the government can then, at any time, whimsically decide to change their mind and declare the mine to be a “strategic” mine,thus causing (say, us) the current license holder to suddenly lose 51% of their interests in the mine and prevented from operating it as they feel is best.” Then, as far as selling mining licenses to foreign concerns – which was responsible for almost all of the recent sudden growth in GDP, the government, in July of last year, set a moratorium on the selling of all mining licenses – thus driving away any investor interested in acquiring a mining license, or for that matter, any investment firm who was wooing foreign investment money into the country. And all this mass exodus of foreign interests is starting to have a dramatic effect on the economy, as inflation is going through the roof now. And the bad economic picture is looking even more bleak, as there is suddenly a severe real-estate bubble as well (of course – a typical bi-product of over-heated boom-times), which will no doubt have to burst sooner, rather than later. And many foreign countries are planning to cut back their foreign aid to Mongolia by 2016, citing that they no longer consider Mongolia to be a “developing country” – and what with all the expensive vehicles and designer clothes to be seen in the capital, there’s no wonder they’d feel this way. And foreign aid still represents the largest chunk of the total GDP for Mongolia – so to lose this as well…well, I shudder to think what the results might be. So the overall economic picture for Mongolia, which one year ago was hailed as the most promising of all UN member nations, now looks quite bleak, despite what the 2013 Oxford report might say about it. And even at already established, major mining companies in Mongolia, according to one executive who deals with procuring permits from the government, there is grumbling from the ex-pat community in Mongolia about all the recent legislation and restrictions. “This is certainly not how they did it, and what it was like in Chile, or Cote D’Ivoire”, they say.

However, the executive goes on to say, (and this is where we get to the big “but” I had mentioned earlier), – more to the point, but this is not Chile, Cote D’ Ivoire, or even Kazakhstan, or Venezuela; this is Mongolia. And they have a right to do things their way, and most importantly, they have a right to protect their rights to sovereignty over their own land. And not just executive jurisprudence over the civilian population, but also to protect their lands, their borders, and all the mineral resources contained therein. And according to this executive, there is a silver lining and definitely a method to their (what seems to be), madness. He has been here many years and is actually surprisingly optimistic. And this caused me to think about it more, as he certainly should have sufficient experience to know what’s really going on. According to him, he says that it’s actually project deadlines which cause them to try to hurry the process, which is what causes the problems, otherwise, what information they require is no more than what any developed country does. And this is actually what the Mongolian government is trying to do now. Mongolia is trying to make their laws more in line with the USA, and other developed nations, albeit perhaps going about it in the wrong way, with equally wrong timing.

Then, according to this official, in regards to the O.T. deal, he says “You could take any contract and make an issue with it. New laws do not mean ‘instability”. And “instability” is exactly how foreign investors are viewing Mongolia these days as an investment destination. They are beginning to see Mongolia as being exactly like investing in Africa, with constantly changing governments, which constantly want to cancel or “renegotiate” all major agreements made by the previous government – and usually for frivolous reasons – mainly just to glorify the new regime. This is exactly what the Tan Sri Sayed Mokhtar Al Bukhary, a billionaire from Malaysia, who I was personally involved with bringing to Mongolia in 2011, according to an associate of mine, cites as his reason for why he has now put all of his previously enthusiastic plans to heavily invest in Mongolia, on the back-burner. But representatives of the new Mongolian government say that these new laws are necessary for the long-term best interests of Mongolia and the Mongolian people, as well as it being necessary to renegotiate the O.T. agreement. They say that in Mongolia’s case, the O.T. mines represent potentially so much of what might be the total GDP of the country for the next 30 years, that it’s imperative to have a fairer deal in place – and that’s it’s worth it to try to renegotiate it even at the expense of all the bad press it’s creating. And this is where we can make comparisons to what essentially happened in Venezuela and Kazakhstan; i.e. Mongolia is a land-locked country stuck in between two giant super-powers, so it is quite vulnerable to being unduly influenced, or even financially dominated, or even eventually taken over by one of these huge super-powers.

In Venezuela, there was a similar situation. When Hugo Chavez took over, he found a nation which had sold most of its resources (mainly oil) to the World Bank, for pennies on the dollar, according to current fair-market prices. These interests were sold by greedy and corrupt politicians who were only interested in further lining their own greedy pockets. And this is also a typical problem in all “developing countries”, and especially steeped in the culture that has existed in most all Asian countries for thousands of years. But in South America, Chavez sought to change all that. He said that his, is a new government, and that it was his right to look out for the best interests of the citizens of Venezuela. He was a rebel in this regard. And he further tried to explain that a G to G contract is different than a contract with an individual – because if an individual reneges, then he just seems to be very irresponsible. But why should a new and improved government of a nation of people be bound to honor an agreement made by greedy, self-serving political predecessors? He argued that the previous agreements were irresponsible – that his predecessors just wanted to profit personally, as well as get some front-loaded money to immediately put a boost in the local economy and improve their own political standing, while putting millions upon millions into their own pockets. I mean, this is how it was done in these kinds of developing countries. It was standard practice, and the world-class foreign negotiators who were sent there to negotiate the past agreements, were accustomed to basically exploiting and fleecing these countries out of their mineral resources by appealing to the greater sense of greed of their leaders and negotiating a lopsided agreement favoring the interests of the super-power. And this is exactly what the 2009 O.T. deal was like. When I first read it when it was published while I was working as the Editor of the UB Post, I immediately could see that this was indeed a bad deal for Mongolia. But, since there was a lot of front-loaded money coming from Rio Tinto, this put an immediate boost in the economy, and the economy started on its mad growth spurt and it was all good. And the orchestrators of the deal were hailed by most as heroes. And this, they thought, would be enough to power their way to victory in the next elections. But Mongolia is a different place. Mongolia is the only beacon of Democratic light in all of Asia, and Democracy may not be a perfect system, but it’s the best one we have so far. And the people of Mongolia are fiercely proud and protective of Mongolian interests – so despite this new agreement and the economic growth spurt – especially since most of the new money did not find its way into the personal pockets of most Mongolian citizens, and since they are not so influenced by their own media, they surprised the powers that be, and overwhelmingly elected a new government, anyway. And then, just like in the case with Chavez in Venezuela, the new powers that wanted to “renegotiate” the unfair and lopsided agreements made by the previous administration, were blasted by the Super-powers and the international media (which the Super-powers greatly influence and manipulate), as just being rouge, and irresponsible. And they responded by putting sanctions and punishments on Venezuela, and sent their economy into a tailspin as well – just like what is happening now in Mongolia. And like with Chavez, this is not Chile (with a recently prosperous and growing economy), or Cote D’ivoire, or even their pseudo-neighbor, Kazakhstan, for that matter. The leaders of the new Mongolian government are not like other developing counties, or countries in the region, and they are not like the corrupt leaders who were previously in power in Mongolia – like Mr. Enkhbayar. They are Democratic, and though, like with most all other countries in Asia, for the most part, most people still get involved in politics for the purpose of improving their own financial status, and not to serve their people, in a Democracy, corruption, though it can still exist (just look at India), nonetheless, by the very nature of the system, it is at least,somewhat limited and checked – and that’s why Mongolia is not like Kazakhstan (which like Chile, is also better economically developed), and this uniqueness will certainly come at a price. Yes, Mongolia will have to eventually pay a dear price for not tolerating fascism, or corruption. But their people seem optimistic, and willing to pay it, no matter what foreign countries, or foreign investors, or even foreign tourists, and the international media thinks about it.

Kazakhstan is much more beautifully developed and modern than Mongolia – but most all of this has been done by the Chinese. And as a result, the Chinese are literally taking over the country in insidious ways. They have an agenda, and they are aggressive about it. The Chinese do not make war, they do it in more sublime ways – and this is how they took over places like Tibet. But in predominantly Muslim Kazakhstan, their workers are forced to sing China-glorifying songs in large groups before work begins – just like in China. And Kazakh workers earn less than the Chinese workers who speak Chinese. And the Chinese are even coercing the government to pass Chinese-oriented laws. And all this is possible due to the extreme greed and corruption of a few who are in power, and this situation is being completely exploited by the Chinese. And it’s actually no different than what the US has done in Iraq, or the Soviet Union tried to do in Afghanistan; etc. – there’s countless examples. China would have been more than happy to help Mongolia out with fulfilling its most recent obligations in the 2009 O.T. deal (which is essentially to build infrastructure – mainly a rail line from the O.T. and T.T. mine sites to connect to existing systems to export the minerals conveniently to the existing and bustling port of Tianjin, China, where they already grant Mongolia “free trade zone” status), but the new government decided to pass on that offer. They decided for once – to not sell out to the money dangled as a carrot from a super-power. And this seems to be a new tact for a “developing” nation to endeavor to do. And maybe there is a better way to manage both objectives. Sure, you want to protect the future interests of your own country and its citizens, but you must also be acutely aware of what the economic damage could be as a result, publicly, of this kind of an agenda, and how it will be viewed by the world. The world-wide media is a very powerful motivator for developing countries to be compliant with the interests of the super-powers, and their mega-corporate entities.

But for whatever the consequences may be, Mongolia is trying to be different. The minerals are still there, and they will be for another 50-100 years, but now they are essentially saying,“This is our land, and these are our minerals, and if you want them, then we must work together to draft or more equitable agreement which can be a win-win for both of us. And if you don’t like that, then go ahead and leave”. And this is a new thing in Asia – but it may well come at a steep price. The upcoming elections will help determine what the voting public thinks about making such potential sacrifices.

By Scott Houston

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