Central Asia Economic Paper

No. 10

November 2013

More than a boon: ’s

Troubled Mine Sector

Mathieu Boulègue

Key Points On June 26, 2013, President Tsakhiagiin 1 Elbegdorj was reelected for a second four-year term upon winning 50.89 per- Mongolian politics are increasingly po-

cent of the vote in the first round of what larized around a nationalist-prone coali-

was the country’s sixth presidential elec- tion advocating for “resource national- A Sciences Po and King’s Col- tion.2 Serving almost as a litmus test on lege alumnus, Mathieu ism” and business-oriented groups look- mining policies in the young Asian de- Boulègue is an analyst in the ing for international investments in the mocracy, the election took place amidst field of Russia/CIS security mineral extraction sector. the backdrop of a decade-long mining and geostrategic issues. He boom which has, however, been tem- currently works as a project pered by calls for resource nationalism The revamped draft version of the Min- manager for a French risk voiced by local populations negatively erals Law is slowly taking Mongolia on management consulting firm. impacted by mining activities. the path of responsible mining, with the He is also a member of the Oyu Tolgoi mine presently at the center Institut Etudes Prospectives This tension has manifested itself in an of attention. en Europe (IPSE). increasingly visible political fragmenta-

tion between nationalist-protectionist The effects of the “mining boom” need to factions and more business-prone forces be contrasted with the rather bleak eco- within the government and the State nomic outlook. Great Khural (the Parliament). The opinions expressed here are those of the author only and do not represent the Cen- tral Asia Program. CENTRAL ASIA ECONOMIC PAPER No. 10, November 2013

As embodied by the ongoing struggle around the votes, and the female health minister Natsag Oyu Tolgoi mining super-project, a huge copper Udval from the Mongolian People’s Revolutionary and gold mine in the south of the country, Mongo- Party (MPRP), who garnered 6.58 percent.10 Im- lia finds itself at a crossroads between openness mediately after the release of the GEC’s official to international investments needed to support report, the Parliament endorsed Elbegdorj’s the economy and demands for responsible and reelection and he was sworn in on July 10 in sustainable mining aimed at protecting national .11 Another notable feature of the nature reserves and ensuring the protection of election was the fact that the Organization for local populations. Security and Cooperation in Europe (OSCE) car- ried out the first Election Observation Mission to A no-trump ballot the county (after it had become a member the previous year) with the mission concluding that With a turnout of 66.5 percent of registered vot- the election had been “free and competitive.”12 ers,3 the incumbent Democratic Party candidate heavily benefited from the support of many small Mongolia between a rock and a hard place political formations, in tune with its own political line, thereby limiting overall competition and President Elbegdorj is seeking to achieve a bal- voter choice. ance between openness and closure to please both the electorate at home and international Indeed, the Civil Will-Green Party,4 the Mongolian investors.13 The issue has polarized Mongolian National Democratic Party (MNDP),5 the Republi- politic, with two major political factions having can Party,6 and the Motherland Party7 had all emerged in the aftermath of the parliamentary announced in May 2013 their intention to sup- elections and the subsequent formation of a coali- port the Democratic Party’s candidate in the pres- tion government. idential election. Among these, the Civil Will- Green Party was an electoral coalition formed On the one hand, the outcome of the latest par- between the Civil Will Party and the Green Party liamentary elections led to the formation of a that took part to the 2000 parliamentary elec- nationalist-prone coalition that could sensibly tions. They subsequently merged in early 2012 renege on economic openness at the expense of ahead of the June parliamentary ballot, winning foreign investors. The coalition government is two seats in the . Although in- currently headed by Prime Minister and Demo- dependent, the Green Party remains politically cratic Party chairman Norov Altanhuyag with close to the ruling coalition, as several members lawmaker Davaajav Gankhuyag serving as Minis- work as environmental advisers to the incumbent ter of Mining. Both men are considered “resource President,8 and Green Party Member of Parlia- nationalists” and are known to have a tough ment (MP) Oyun Sanjaasuren now serves as Min- stance regarding international mining companies ister of Environment and Green Development. and foreign investments. Furthermore, the gov- Similarly, the Motherland Party—also known as ernment includes members of the People’s Revo- the Democratic New Socialist Party—is close to lutionary Party (MPRP) and the MNDP, who are the ruling party, with several of its prominent advocating for better control over national re- members having served as ministers under the sources. The Justice Coalition also uses its lever- Democratic Party government.9 age in the State Great Khural to push for resource protectionism: formed in 2012 as an electoral Only three candidates officially registered with bloc between the MPRP and the MNDP, it seeks to the General Election Commission (GEC) to run for restrict the shares of international extracting the post of president—that is, contenders stem- companies and curb foreign investments. ming from political parties holding seats in the State Great Khural. Hence, Elbegdorj competed These nationalist Members of Parliament might against former wrestling champion and MP very well decide to increase their pressure on Badnaanyambuugyn Bat-Erdene standing for the bills fostering greater national sovereignty, espe- Mongolian People’s Party—the former Com- cially since the Democratic Party only retained 31 munist Party—who obtained 42.52 percent of the seats in the 76-seat legislature. 14 Nationalist-

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CENTRAL ASIA ECONOMIC PAPER No. 10, November 2013 oriented forces could, for instance, back “Resolu- sion of the issuance of mining and exploration tion 57” (named after the 57th Resolution of the licenses in 2010 and also initiated the complete State Great Khural) whereby Mongolia could seek overhaul of mining laws after setting up a work- to acquire 50 percent of the stakes in the Oyu ing group under the President’s Office in 2011. Tolgoi mine and thus ensure greater control over The suspension of licenses was reconfirmed by national resources.15 the State Great Khural in December 2012. Since the 1997 Minerals Law, in fact, exploration li- On the other hand, business-oriented political censes have halved from 6,000 to 3,000 today.21 forces are trying to push for an increasingly larg- er part of the mining cake: the importance of for- The first draft of the revamped Minerals Law was eign investments in Mongolia is constantly used made public in December 2012,22 coming under by certain politicians as a leitmotif in internation- heavy criticism from both mining companies and al speeches.16 Both the ruling Democratic Party investors. As such, the draft law restricts the is- and the Civil Will-Green Party are trying to act as suance of mining licenses—prospecting licenses a counterweight against resource nationalists. An will be reevaluated every year—as well as state increasing conflict of interests is occurring be- involvement in the ownership of shares.23 The tween business opportunities and people’s de- new draft law also takes into consideration envi- mands for responsible and sustainable mining, ronmental protection through the framework of with the Democratic Party consequently having the 2009 Law on the Prohibition of Minerals Ex- to adopt the political middle ground.17 ploration in Water Basins and Forested Areas as well as local development for populations con- The political split presently occurring over the cerned by mining activities. mining issue can also be seen when analyzing the results of the presidential elections. Elbegdorj President Elbegdorj declared in February 2013 was mostly backed by the young, urban strata of that there needed to be greater national oversight the population and the middle-classes of the capi- of international mining projects through the tal18—he received an average of 55 percent votes presence of Mongolian representatives on the in urban areas compared to 47 percent outside of managing boards of concerned companies as well Ulaanbaatar—whereas Bat-Erdene fared better in as greater responsibility in managing costs and the rest of the country, especially in mining re- allocation of resources.24 This was further rein- gions.19 As such, a strong divide exists between forced by the April 2013 amendments to the Reg- urban dwellers preoccupied by the overall eco- ulation of Foreign Investment in Business Entities nomic development of Mongolia and rural popu- Operating in Sectors of Strategic Importance (SSI lations directly affected by mining activities and Regulation) of May 2012: new provisions in the therefore more prone to vote for candidates with foreign investment law differentiate bids made by strong positions against international mining state-owned enterprises (SOE) from those made companies. It needs to be recalled that rural by foreign companies25 as well as introduce mon- Mongolians are mostly herders whose way of life etary thresholds for international private ac- and subsistence economy have been considerably tors.26 Provisions of the draft law also include a affected by mining activities in terms of environ- long-term regulatory framework concerning en- mental pollution and lack of sustainable devel- vironmental protection (especially against pollu- opment. tion of waters and pastures), the fight against corruption, and the integration of local communi- Taking the path of responsible mining ties in the decision-making process.

Now that the Democratic Party has managed to In order to keep tabs on extraction-related legis- secure the key political positions of president, lative changes, public debates are now being or- prime minister, Chairman of Parliament, and ganized under the auspices of the Citizen’s Hall of Mayor of Ulaanbaatar, reforms to the mining laws Mongolia in order to listen to the suggestions and can proceed apace.20 Although the president does concerns of interested parties.27 Monthly gov- not have the final say in mining regulations, his ernment-approved “Transparent Mining” press administration was responsible for the suspen- conferences are also held to keep the public in-

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CENTRAL ASIA ECONOMIC PAPER No. 10, November 2013 formed about mining activities in the country, Further disagreements occurred over the sum- including relations with international extracting mer concerning the financial feasibility of the companies.28 second phase of the project after Rio Tinto was unable to agree with the Mongolian government Contention over Oyu Tolgoi on the financing method for the underground portion of the mining complex—the expansion of A pertinent example of these mining intricacies which could cost as much as $5 billion.32 The Ex- involved is embodied by the quarrel currently ecutive Director of Erdenes Oyu Tolgoi, Tserenbat pitting Anglo-Australian company Rio Tinto and Sedvanchig, was subsequently demoted and re- its partner Canadian Turquoise Hill against the placed by MNDP chairman Davaadorj Ganbold.33 Mongolian state over the Oyu Tolgoi copper and The announcement of the project’s suspension in gold mine super-project located in the South Gobi late July even caused the share price of Turquoise Desert. Hill to drop 20 percent of its value.34 In the mean- time, Rio Tinto replied with a tit-for-tat gesture The open pit and underground mineral deposits by suggesting that some 1,700 workers and con- constitute the world’s second-largest mine: the tractors might be laid off from the mining opera- complex should produce 450,000 tons of copper a tions at Oyu Tolgoi.35 year—accounting for three percent of worldwide production—as well as nine tons of gold in the In response, President Elbegdorj announced that first decade of operation. Upon reaching full pro- the “time has come for the Mongolian govern- duction, slated for 2021, it is expected to account ment to take Oyu Tolgoi matters into its own for 35 percent of Mongolia’s annual GDP. The hands.”36 At the end of the day, the government is right to exploit the deposits were given in 1999 to afraid of how much the mining project will actual- the Canadian firm Ivanhoe Mines, but it was only ly cost: due to the “called sums” principle stipu- after the Mongolian government passed legisla- lated in the 2009 agreement,37 Mongolia has to tion to open the shafts to foreign investments that pay for a part of the cost overruns equivalent to a joint-venture agreement was signed in October its 34 percent shares. The state-owned firm 2009 between the Mongolian state, Rio Tinto, and Erdenes Oyu Tolgoi has a purchase option of an- Turquoise Hill (formerly Ivanhoe Mines), both other 16 percent after 30 years, as per the terms with a combined 66 percent of the shares. On July of the agreement.38 As evidenced by the strained 9, 2013, the Oyu Tolgoi copper concentrator plant relations, Oyu Tolgoi might represent a landmark shipped its first ever exports consisting of 40,000 in the way Mongolia deals in the future with for- tons of copper concentrate.29 Operations at the eign actors in the national mining sector. Rio Tinto unit had begun on time in early 2013. An uncertain future Despite these positive results, the Mongolian government has been putting pressure on Rio In spite of the mining woes somewhat darkening Tinto and its business partner Turquoise Hill the picture, Mongolia remains a booming econo- since last February, when it was revealed that the my characterized by a growth rate of 12.3 per- first phase of the project was US$2 billion more cent in 2012 and a World Bank forecast of 13 expensive than initially planned, standing cur- percent for 2013.39 Albeit the figures have de- rently at $6.6 billion.30 A parliamentary session creased since it recorded a 17.5 percent growth was convened in early February 2013: the gov- rate in 2011: this was partly caused by a struc- ernment and Rio Tinto met several times over the tural fiscal deficit of 8.4 percent of GDP,40 which course of the year to discuss at least six points of sharply contrasts with the 2 percent limit provi- contention, including development cost overruns, sioned by the Fiscal Stability Law. Furthermore, the alleged lack of Rio Tinto’s accountability and little progress was made in modernizing the transparency, employment and contractors, cor- country’s economy, addressing the worrying in- porate governance, environmental issues, as well flation rate (8.8 percent in July 201341), and tack- as the absence of timely reporting.31 ling rampant urban poverty. Calls for resource nationalism hardly counterweight the need for foreign investments that Mongolia desperately

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CENTRAL ASIA ECONOMIC PAPER No. 10, November 2013 depends upon. This was evidenced by the issu- ance in November 2012 of $1.5 billion worth of 9 “Байгаль орчин ногоон хөгжлийн сайдад С.Оюуны governmental bonds in debt—dubbed the нэрийг дэвшүүлэхээр боллоо,” Gogo news, August “Chinggis Bonds” by the local media—aimed at 20, 2012, http://news.gogo.mn/r/109718. raising money on international financial markets. 10 See Mонгол улсын ерөнхийлөгчийн анхан шатны The multi-year bonds were successfully traded at сонгуулийн нэгдсэн дүн, no date, http://www.gec.gov.mn/file/batalgaajsan.html. the end of November 2012 and the money has 11 “Mongolia president sworn in pledging rapid devel- been used ever since to finance major develop- opment,” Business-Mongolia, July 11, 2013, ment projects such as upgrading railway infra- http://www.business- structure, renovating power plants, and devel- mongolia.com/mongolia/2013/07/11/mongolia- opment of the light industry sector.42 president-sworn-in-pledging-rapid-development/. 12 See the OSCE/ODIHR Election Observation Mission – Furthermore, the mining boom has not yet man- Statement of Preliminary Findings and Conclusions, aged to decrease the country’s dependency on its June 27, 2013, neighbors. Despite attempts to assert itself as a http://www.osce.org/odihr/elections/103142. 13 diplomatically independent actor43 Mongolia re- “Elbegdorj scrapes home,” The Economist, June 29, mains constrained between Russia’s and China’s 2013, http://www.economist.com/news/asia/21580207- strategic clout: it heavily depends on both in foreign-investors-will-cheer-incumbents-narrow- terms of commerce and trade, and especially on triumph-elbegdorj-scrapes-home. their energy and freight capabilities for trans- 14 See IFS Election Guide: porting its resources abroad. If Mongolia wants to http://www.electionguide.org/results.php?ID=1611. sustain its economic growth, it will have to learn 15 See Ivanhoe Mines, Joint response from Ivanhoe how to allocate its financial assets somewhat bet- Mines and Rio Tinto delivered to Mongolian Government ter, and avoid any “resource curse”.44 and members of the National Security Council, October 3, 2011, http://www.turquoisehill.com/i/pdf/2011- 10-03_NR.pdf. 16 “Hot Topic of Coal Mongolia 2013: Transportation,” 1 Democratic Party leader Tsakhiagiin Elbegdorj as- UBPost, February 21, 2013, sumed the position of Prime Minister twice before http://ubpost.mongolnews.mn/?p=2928. being elected President in 2009. A former journalist, 17 Mendee Jargalsaihany, “Mongolian presidential elec- he spearheaded the post-Communist democratic tion ends in ruling Democratic party’s favor,” Eurasia movement in Mongolia. See: Daily Monitor, Jamestown Foundation, 10:124, July 8, http://www.president.mn/eng/president/biography. 2013, php http://www.jamestown.org/single/?no_cache=1&tx_tt 2 “Ц.Элбэгдорж 50.23 хувийн саналаар ялалт news[swords]=8fd5893941d69d0be3f378576261ae3 байгууллаа,” Shuud, June 26, 2013, e&tx_ttnews[any_of_the_words]=mongolia&tx_ttnews[ http://www.shuud.mn/?p=249992. tt_news]=41098&tx_ttnews[backPid]=7&cHash=e374 3 See the Electoral Commission results 1ecae4002652fdd3b2f52968efa9#.Uf9W-223N8F. http://www.gec.gov.mn/election2013/flashresults.ht 18 “A second chance for Mongolia’s President,” Busi- ml. ness-Mongolia, July 4, 2013 http://www.business- 4 “CWGP announced to support current President TS. mongolia.com/mongolia/2013/07/04/13151/. Elbegdorj,” InfoMongolia, May 10, 2013, 19 “President gets re-elected,” Business-Mongolia, June http://www.infomongolia.com/ct/ci/5982. 27, 2013, 5 “MNDP announced not to promote its candidacy for http://www.business- the presidential election,” InfoMongolia, May 10, 2013, mongolia.com/mongolia/2013/06/27/president-gets- http://www.infomongolia.com/ct/ci/5981. re-elected/. 6 “Republican party and Motherland party to support a 20 See above. Jargalsaihany, “Mongolian presidential candidate from Democratic party,” InfoMongolia, May election ends in ruling Democratic party’s favor”. 29, 2013, http://www.infomongolia.com/ct/ci/6064. 21 “The mining law draft explained,” Mongolian mining 7 Ibid. journal, January 23, 2013, 8 See the CWGP website: http://en.mongolianminingjournal.com/content/4316 http://www.civilgreen.mn/nam/2011-01-20-07-02- 4.shtml. 22.html. 22 See Revised Minerals Law, Office of President, De- cember 5, 2012,

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CENTRAL ASIA ECONOMIC PAPER No. 10, November 2013

http://www.president.mn/mongolian/sites/default/fi 37 Namely payments made to capital expenditures les/Draft%20Minerals%20Law%20as%20of%205%2 proportional to share ownership. See Brian White, “In 0December%202012%20ENG.pdf . depth analysis: OT dispute and expenditure overruns,” 23 “The mining law draft explained”. The Mongolist, March 10, 2013, 24 “President: Time has come for Mongolia to take Oyu http://www.themongolist.com/blog/government/58- Tolgoi matters into its own hands,” Mining.com, Febru- in-depth-analysis-ot-dispute-and-expenditure- ary 4, 2013, http://www.mining.com/president-time- overruns.html. has-come-for-mongolian-government-to-take-oyu- 38 See Turquoise Hill, Oyu Tolgoi Overview: tolgoi-matters-into-its-own-hands-94654/. http://www.turquoisehill.com/s/Oyu_Tolgoi.asp. 25 “Recent Changes to Mongolia's Foreign Investment 39 “World Bank Cuts Growth Forecast for Mongolia as Laws: Opportunities and Challenges for Foreign Inves- Exports Slow,” Bloomberg, April 30, 2013, tors,” JD Supra Law News, May 29, 2013, http://www.bloomberg.com/news/2013-04- http://www.jdsupra.com/legalnews/recent-changes- 30/world-bank-cuts-growth-forecast-for-mongolia-as- to-mongolias-foreign-inv-16913/. exports-slow.html. 26 "Mongolia’s evolving foreign investment regime,” 40 “The World Bank: Mongolia Economic Update April Forum, January 9, 2013, 2013,” Business-Mongolia, April 30, 2013, http://www.eastasiaforum.org/2013/01/09/mongoli http://www.business- as-evolving-foreign-investment-regime/. mongolia.com/mongolia/2013/04/30/the-world- 27 Jargalsaihany, “Major revisions of Mongolian mining bank-mongolia-economic-update-april-2013/. regulations is underway”. 41 See Mongolia inflation rate, Trading economics: 28 For the latest example, see “Transparent Mining http://www.tradingeconomics.com/mongolia/inflatio reports on the nation’s mining activities,” UBPost, July n-cpi. 30, 2013, http://ubpost.mongolnews.mn/?p=5249. 42 “As of today, 347 million USD is left from the Ching- 29 “Oyu Tolgoi’s 40,000 tons of copper concentrate gis Bond,” InfoMongolia, May 20, 2013, ready for export,” UBPost, July 7, 2013, http://www.infomongolia.com/ct/ci/6020. http://ubpost.mongolnews.mn/?p=4742. 43 See my previous paper: “Landlocked assertiveness: 30 “Mine audit launched to resolve Oyu Tolgoi cost Mongolia’s restructured realism in a more complex overrun,” UBPost, April 22, 2013, world?” Central Asia Economic Paper no. 4, October http://ubpost.mongolnews.mn/?p=3701. 2012. 31 “Oyu Tolgoi shareholders unable to reach agree- 44 “The World Bank: Mongolia Economic Update April ment,” UBPost, March 3, 2013, 2013,” Business-Mongolia, April 30, 2013, http://ubpost.mongolnews.mn/?p=3169. http://www.business- 32 "Rio announced 1,700 redundancies,” Business mongolia.com/mongolia/2013/04/30/the-world- Council of Mongolia, August 15, 2013, bank-mongolia-economic-update-april-2013/. http://www.bcmongolia.org/en/mongolia- business,news/726-rio-announced-1,700- redundancies. 33 “TS. Sedvanchig was dismissed and replaced by Davaadorj Ganbold,” InfoMongolia, August 19, 2013, http://www.infomongolia.com/ct/ci/6502. 34 “Oyu Tolgoi LLC Executive Director Fired Following Rio Dispute,” Bloomberd Businessweek, August 19, 2013, http://www.businessweek.com/news/2013-08- 19/oyu-tolgoi-llc-executive-director-fired-following- rio-dispute. 35 “Rio Tinto lays off 1,700 Oyu Tolgoi mine workers as dispute drags on,” Financial Post, August 18, 2013, http://business.financialpost.com/2013/08/14/rio- tinto-lays-off-1700-oyu-tolgoi-mine-workers-as- dispute-drags-on/. 36 “President: Time has come for Mongolia to take Oyu Tolgoi matters into its own hands,” Mining.com, Febru- ary 4, 2013, http://www.mining.com/president-time- has-come-for-mongolian-government-to-take-oyu- tolgoi-matters-into-its-own-hands-94654/.

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