Before the gold rush

ONE of the world’s fastest-growing economies, Mongolia finds itself at odds with the sources of its new-found wealth: the foreign miners and financiers dazzled by the unfathomable bounty under its vast terrain. Some foreigners fear that populist politicians, pandering to a belief that the nation is selling its birthright too cheaply, may kill the goose before it has laid any golden eggs. Almost certainly not; but “resource nationalism” will surely make life uncomfortable for geese.

Because of falling commodity prices and a slowdown in China, which takes over 85% of its exports, Mongolia’s roaring economy slowed drastically last year—to a mere 12% or so GDP growth, from over 17% in 2011. But the benefits produced by these giddy numbers remain elusive for many Mongolians. The frozen main streets of Ulaanbaatar, the capital, are gridlocked. In the glitzy mall in Central Tower, it is warm enough to browse the posh shops in a T-shirt. Yet more than half of Ulaanbaatar’s 1.3m people live in “ger districts” on its fringes, shanty towns of felt tents often with no running water or electricity. According to the IMF, the number of Mongolians living in poverty fell by about ten percentage points in 2011, thanks to government handouts. But that still left some 30% below the poverty line. For them, the most obvious effects of the inflow of foreign money are sharply rising prices, unplanned urbanisation and the presence of rich-looking foreign visitors and residents.

In a vibrant young democracy, plenty of politicians tell Mongolia’s 2.8m people that they should be faring better as the country hurtles towards rich-world average incomes. In parliamentary elections last June, about a quarter of the seats went to “resource nationalists”, advocating local control of the mines. Such nationalists make up about a third of the cabinet of the coalition government led by the Democratic Party.

During the campaign, a scandal blew up when the foreign-controlled owner of Ovoot Tolgoi, a Mongolian coal mine, wanted to sell it to a Chinese state-owned enterprise. Acutely conscious of their commercial dependence on China, Mongolians are sensitive to any hint of its gaining control over them. A “strategic entities foreign-investment law” was pushed through, tightening approval procedures. Mongolia is far from unique in having such a law, but it was taken as a sign of an incipient backlash.

A presidential election is due in May. The incumbent, Tsakhia Elbegdorj, of the Democratic Party, is the favourite, and is closely identified with the opening to foreign investment. But new draft mining legislation from his office has provoked howls of protest from the industry, which claims its restrictions would deter all new investment in mining. And this month the president weighed into the foreigners behind much the biggest project in Mongolia to date, the Oyu Tolgoi (“Turquoise Hill”) or “OT” copper-and-gold mine. OT is expected to contribute one-third of GDP by 2020, and is the basis of the strategy of rapid growth fuelled by foreign investment in mining. Some 34% of OT is owned by the Mongolian government and 66% by Turquoise Hill Resources (which also controls the firm that owns Ovoot Tolgoi), a subsidiary of Rio Tinto, a British-Australian mining behemoth.

The mine has just produced its first copper concentrate. It is expected to begin commercial production by the end of June. In the Gobi desert, just 80km (50 miles) from the border with China, which will buy its product, it seems well on track to meet the ambitious hopes vested in it. Yet the president accused the company of having spent more than had been scheduled when the investment agreement was signed in 2009 (nearly $7 billion so far); of being slow in explaining why; of paying its management too much; and of employing more foreigners than it was supposed to. In rebutting these slights, OT pointed out that Rio is shouldering most of the project’s risks. It is lending the government the money for its share of the investment, and the loan will never be repaid if the mine does not make enough money.

Cynics suggest Mr Elbegdorj’s tirade may have owed something to two related factors other than genuine concerns about the project and posturing ahead of the election. One is the government’s gaping budget deficit. OT is already a big taxpayer. By piling on pressure, the government may hope to extract more revenue from it. The second is a fiasco at a potentially even more lucrative project—the nearby coal mine at Tavan Tolgoi (TT). To meet the government’s cash-handout promises, coal from TT was presold to China at prices below what it now costs to mine and transport it. Plans for a global share offering for TT are on hold.

So a row with OT is not all bad for the government. And at least it is not threatening, as it did last year, to renegotiate the investment agreement or expropriate part of Turquoise Hill’s stake. The smug consensus among foreign businessmen is that the government needs Rio more than Rio needs it. That may well be true; but it is all the more reason to expect the government to be suspicious of its foreign partner. By refusing to support OT’s efforts to raise bank finance for the expensive second, underground, phase of the mine, it has found a powerful lever. At a time of stress in global mining, when projects elsewhere are facing the axe, this is a dangerous game.

My name is Chinggis

Mongolia knows its own appeal to global investors. In November it raised $1.5 billion in international markets. Its bond, inevitably called “Chinggis” after the national hero, Genghis Khan, was heavily oversubscribed, and traded initially on terms better than those available to, for example, Spain. But the price of the Chinggis has proved as volatile as its namesake and much more vulnerable to shareholder disputes. Some investors hope the government will moderate its behaviour. But is the land of Genghis, conqueror of China and most of the Eurasian land mass, really going to quail before the scribblers in the bond markets?

Economist.com/blogs/banyan