Mongolia: Setting the tone for investment

Concerns that a new foreign investment law would severely impact Mongolia’s natural resource sector and economy as a whole are beginning to ease, as industry players now see that reformed legislation is necessary for the country’s economic evolution.

Reports in early May that the Mongolian government was planning to enact wide-ranging limits on foreign ownership in several sectors, including mining, agriculture and banking, led to speculation over an investor exodus, despite the country’s vast and untapped metals and coal reserves.

According to a recent report in The Ulaanbaatar Post, “Approval of the current draft law will be felt throughout the country, as decreasing investment drives down disposable income and job security. Politicians behind this law will be to blame for a large missed opportunity for further growth and wealth to all Mongolians”.

However, in a nod to foreign interests, the law’s provisions were significantly diluted before its approval on May 17. Projects worth more than $80m will not be required to have majority Mongolian ownership. Additionally, the number of strategic sectors that were previously required to be 51% state-controlled was also reduced. The legislation is also not retroactive; various mining companies have confirmed that existing iron ore and other projects will not be affected.

Indeed, some investors believe these regulatory changes will eventually improve the long-term prospects of the country. Officials from Aspire Mining, which owns the Ovoot coking coal mine and rail project in northern Mongolia, told Reuters that the new law would provide more certainty for investors in Mongolian resources and that it would not limit potential funding sources for Aspire’s mine and rail project, which is expected to cost a total of $2bn.

The law tightens a liberal investment regime, built in the 1990s on advice from international organisations, particularly the World Bank, which aimed to spur growth in the post-Soviet economy. However, these plans were made before the country’s vast minerals wealth became apparent, with the massive Oyu Tolgoi copper and gold mine set to double the size of the economy when it comes on-stream in 2013. The giant Tavan Tolgoi coal deposit will also play its part, as it is estimated to hold some 6bn tonnes of reserves.

“It is a good law for Mongolia and provides stability and clarity for investors,” said Eric Zurrin, the CEO of ResCap, a boutique investment bank in Ulaanbaatar. “This brings Mongolia more in line with mature, resources-rich economies, such as Australia and Canada.”

The investment legislation – which requires a parliamentary review of investment by foreign state-owned enterprises – is seen as protecting against China buying up large segments of Mongolian industry. However, it is unlikely to impact on minerals demand from the energy-hungry giant and may serve to improve Ulaanbaatar’s negotiating power.

Coal imports from China are expected to more than double by 2015, with India close behind, as both continue to take up supplies on international markets to feed their rapidly growing power industries. In mid-May, India’s state-owned steel authority announced it would acquire a mine in Mongolia, as well as establish the country’s first steel plant to lower its dependence on Australian coking coal.

The introduction of this law is likely to be viewed as political posturing before elections on June 28, with the ruling party seeking to reassure Mongolian voters that foreign entities will not enjoy the spoils of the country’s hoard of coal, copper, gold and other natural resources on their watch.

However, it can also be argued that the legislation seeks to put the interests of future generations of Mongolians ahead of foreign investors by protecting the country’s precious natural resources from overexploitation. However, encouragement of grassroots growth in industries other than mining will also help see domestic firms take a firmer grasp on the economy’s future.


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