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Events
With massive deposits of vital raw materials, Mongolia is drawing the world’s keen attention www.nzz.ch
Resource-rich Mongolia is being rediscovered as an important partner in northeast Asia. However, the riches under the earth have not yet brought the country general prosperity.
The seat of government in Ulaanbaatar has recently become an irresistible draw for prominent Western treasure hunters. In late May, on his way back from the G-7 summit in Japan, Emmanuel Macron became the first French president to visit the Mongolian capital. His goal was to secure access to Mongolian uranium for France's nuclear power plants, as an alternative to Russia.
Two weeks later, it was Elon Musk, citing the country’s rich deposits of copper and rare earths, who brought up the idea of building a Tesla battery factory in Mongolia during a videoconference with Prime Minister Luvsannamrsai Oyun-Erdene. Over the same period, German-Mongolian intergovernmental negotiations have been launched in the capital with the goal of breathing life into an as-yet-anemic bilateral raw materials partnership.
Strong dependence
These renewed approaches to Genghis Khan's heirs bring back memories of a time some 15 years ago, when Mongolia's wealth of raw materials earned the country its nickname of «Minegolia.» In 2009, the British-Australian Rio Tinto Group reached an agreement with the Mongolian government on what remains the country's largest such joint venture, with Rio Tinto serving as the largest shareholder. The venture has rights to exploit the huge Oyu Tolgoi copper and gold deposit in the southern Gobi Desert.
The example of Germany, which built up a particularly close relationship with the former Soviet satellite state after Mongolia's peaceful transition to democracy and a market economy in 1991, shows how quickly European interest once evaporated. In 2011, Chancellor Angela Merkel traveled to Ulaanbaatar to conclude a major raw materials partnership. In fact, the only noteworthy element that has been realized thus far is the creation of the German-Mongolian University for Raw Materials and Technology (GMIT) for the training of specialist engineers.
This has not slowed the pace at which mining has developed into what is today the most important cornerstone of the Mongolian economy, by some distance. Rising from a share of only 10% in 2000, around a quarter of the country’s gross domestic product (GDP) was generated in the raw materials sector in 2022. Similarly, about 25% of government revenues come from mining, which in turn accounts for about 40% of total investment in the country, including foreign direct investment.
The country remains strongly exposed to international market risk in two respects: first, in its high susceptibility to price fluctuations on the international commodity markets, and second, in its almost exclusive dependence on one main customer. Accounting for nearly 85% of Mongolia's exports, almost all raw materials destined for export, especially iron ore, coal and copper, are shipped to China.
Of the more than 100 graduates of GMIT, which launched in 2013, all apparently had jobs before they graduated. The most coveted employer is the Oyu Tolgoi joint venture, with its 20,000 employees. There, the starting monthly salary for engineers, the equivalent of 1,200 Swiss francs, is three times higher than the average wage.
After several years of turbulence, the second stage of underground copper mining finally began this spring. The operation has a targeted total annual output of up to 3 million tons of copper concentrate, further increasing the demand for labor. Together with the approximately 50,000 jobs being indirectly created, this is a significant economic factor in the country, which is almost three times the size of France but has a population of just 3.4 million.
The hundreds of mostly young Mongolians who besieged government offices in Ulaanbaatar for two weeks last December in subzero temperatures took a less rosy view of this resource wealth. The protests, which drew an unusually high level of participation, were triggered by the «coal mafia» scandal that had been uncovered by whistleblowers and then made public by the government surprisingly quickly.
When the coal exports reported in the customs statistics were compared with the quantities actually delivered to China from the mammoth deposits in the southern Gobi, it emerged that additional millions of tons of coal worth several billion dollars had found their way over the years into the neighboring country, bypassing the books. This had apparently been done in complicity with the state-owned company, Erdenes Tavan Tolgoi.
The list of those suspected of involvement in the criminal activities and now under investigation reads like a Who's Who of the political elite, from the former parliamentary speaker Myegombo Enkhbold to ex-president Khaltmaa Battulga, who hurriedly disappeared to South Korea in December.
The frustration and anger unleashed by the news had been building up for some time – in large part as a result of the existential hardship into which the COVID-19 pandemic plunged much of society. The question of why the mining profits were reaching the bulk of the population only in dribs and drabs had become increasingly urgent.
Figures compiled by the World Bank reveal that successive governments have done little to turn this effervescent source of funds to sustainable use, for instance by expanding the country’s future economic base and creating the conditions for growing prosperity. According to that study, 99 cents of every dollar collected from the extractive industry had been consumed over the 20-year period, and only 1 cent had been saved for future investment.
This consumption spending also encompasses the roughly 30% that were used for purposes of social support. This includes superficially generous transfer payments that served largely as political appeasements, especially before elections, but had little lasting effect. However, the period since 2017 has seen some policy reversal, reflected in increased payments into the fiscal stabilization fund and the new sovereign wealth fund launched at the end of 2022.
Return of geopolitics
The rediscovery of Mongolia as an important partner in northeast Asia has come for two primary reasons. In geopolitical terms, it is the observation that the lone democratic state in the region is in danger of being crushed by its autocratically ruled neighbors, China and Russia. This prospect has drawn growing concern in the EU in particular.
There is currently no alternative to the tripartite cooperation being conducted through the China-Mongolia-Russia Economic Corridor (CMREC), established in 2016, which opens access to Chinese seaports for the landlocked country and to Europe via a modernized rail link. But this high level of economic dependence has come at a political cost for Mongolia, which is trying to anchor itself in all directions with «third neighbor» partnership policies intended to protect its independence.
The most recent example is the massive pressure exerted on the government and the public by Russia, a key energy supplier to the country, after the invasion of Ukraine. In a global showdown, Beijing and Moscow are now working in tandem to cut off Mongolia's freedom of choice in foreign policy.
The second motivation for the renewed Western interest in Mongolia is the global hunt for raw materials necessary for the energy transition, along with the desired diversification of supply sources beyond China.
Exaggerated hopes
By estimating the value of Mongolia's commodity holdings at $3 trillion, the International Monetary Fund has put a gigantic figure into play. Volker Steinbach, vice president for raw materials at the Federal Institute for Geosciences and Natural Resources (BGR) in Hanover, says he regards such figures as simply misleading, because they do not take into account the criteria on which the usability of raw material deposits depends.
According to Steinbach, a realistic assessment of the deposits' potential would have to include the local geological and ecological conditions; the economic efficiency of exploitation activities, including the existing infrastructure; the transport costs incurred during export; and the policy environment facing investors in the country. To some extent, Mongolia is a difficult environment as measured by these criteria.
The best-documented deposits are iron ore, copper, gold and coal. In addition, there are considerable reserves of uranium, molybdenum and tungsten, as well as the mineral fluorspar, which is used in industrial processes. Mongolia has the world's third-largest reserves of this latter mineral. All of these are being extracted on a large scale.
By contrast, the development of deposits of lithium, a raw material used in batteries, and of rare earths, which Canadian companies and now South Korea want to enter on a large scale, is still in its infancy and has not yet progressed beyond pilot projects.
However, the expectations driven up by the high levels of demand have been dampened somewhat by a recently updated BGR study on Mongolia’s rare earth reserves. This lists around 80 deposits, six of which were investigated in detail. The report indicated that all of these deposits are located far inland, and will thus require huge infrastructure investments to develop.
The EU puts out its feelers
According to the report, entry would be an economically viable option for the EU only if the raw materials extracted could be processed locally, and did not have to be transported thousands of kilometers via China or Russia.
During Prime Minister Oyun-Erdene's inaugural visit to Berlin last fall, German Chancellor Olaf Scholz assured his guest that Mongolia would be «an important partner» in Germany's diversification strategy for critical raw materials. The ambitious envisaged cooperation agenda ranges from support for the development of raw materials processing to the increased use of renewable energies.
Mongolian expectations are correspondingly high, focused not only on Germany, but on the EU as a whole. The appointment of top diplomat Luvsanvandan Bold to the post of ambassador in Brussels further illustrates the importance attached by Ulaanbaatar to intensive cooperation with the Europeans. As defense minister and later as foreign minister, Bold showed himself to be particularly committed to friendly relations with the EU.
The most recent bilateral agreement is the inclusion of Mongolia in the EU's Forest Partnership Program, which serves climate and nature protection goals. On the other hand, it is not yet clear if or when Mongolia will also benefit from the EU-Asia connectivity strategy adopted in 2018 as a project competing with China's Silk Road Initiative.
BY Jürgen Kahl
Published Date:2023-06-28
