Publication: Eurasia Daily Monitor Volume: 3 Issue: 135

During a visit to Mongolia this week, Russian Prime Minister Mikhail Fradkov reiterated earlier pledges to strengthen economic ties with Ulan-Bator, once Moscow’s closest ally in Asia.

Russia and Mongolia can achieve a breakthrough in trade and economic ties, Fradkov said. Both sides have drafted a blueprint for a program to develop trade for 2006-2010, he said at a post-meeting news conference on July 11.

Fradkov, on behalf of President Vladimir Putin, invited Mongolian President Nambaryn Enkhbayar to visit Russia later this year. At their meeting, Fradkov and Enkhbayar reportedly agreed, “Cooperation between the two countries has good prospects” (Interfax, July 11).

Fradkov said that Russia and Mongolia would consider “a number of major projects” in the coming months, including ventures in geological research, mining, transport, construction, energy, and other sectors. Fradkov also indicated that “major Russian companies such as Severstal, BazEl, Renova, [and] Norilsk Nickel,” are currently mulling projects in Mongolia. “Russian business is interested in [Mongolia’s] coal, copper, gold, and uranium deposits,” he said.

Russia’s Severstal steel company has long indicated an interest in Mongolia’s Tavan-Tolgoi coal deposit with estimated reserves of 5-6 billion tons. Severstal reportedly sought backing from President Putin in order to convince Mongolian authorities to develop Tavan-Tolgoi.

A license to develop Tavan-Tolgoi is currently held by Mongolia’s Energy Resources, a small firm allegedly close to former president Punsalmaagiyn Ochirbat, according to Russian media reports (Kommersant, April 6).

Roman Deniskin, head of Severstal-Resource, argued that the development of Tavan-Tolgoi would raise Mongolia’s GDP by 25% percent. “However, it remains who owns the rights to develop the deposit, this is why there were no investments in Tavan-Tolgoi,” he said. In response, Mongolia’s Industry and Trade Minister Bazarsad Jargalsaikhan said the government had received good offers from Chinese and Japanese firms seeking to develop Mongolia’s mining sector, but none from Russian companies so far (Rossiiskaya gazeta, July 13).

Meanwhile, Fradkov also urged both sides to improve the efficiency of the Erdenet, Mongolrostsvet, and the Ulan-Bator Railway joint ventures, which he described as “flagships of Russian-Mongolian cooperation,” Fradkov said (Itar-Tass, July 11).

As a legacy of close bilateral ties during the Soviet era, Russia still has more than 200 joint ventures in Mongolia, with Erdenet Mining and the Ulan-Bator Railway topping the list. Russia holds a 49% stake in Mongolia’s major copper producer, Erdenet, and Mongoltsvetmet joint ventures. There are 265 smaller joint ventures in Mongolia, with combined Russian investments of $20 million.

Mongolian Prime Minister Miegombyn Enkhbold reportedly hailed the good prospects for bilateral economic cooperation. However, he also said that Russian investments in Mongolia have been inadequate, a mere $46 million in the past 15 years (Rossiiskaya gazeta, July 13).

In recent years, the annual trade turnover between Russia and Mongolia has amounted to little more than $200 million (roughly one-tenth of Mongolia’s foreign trade), of which the bulk consisted of Russian petrochemical exports. Moscow’s ties with Mongolia appear to remain limited to border trade. The Russian Siberian regions are responsible for 70% of Russia’s overall trade with Mongolia, including some 80% of Russian exports, mainly petrochemicals.

In an apparent bid to increase and diversify bilateral trade, Russia and Mongolia signed an agreement on wheat supplies. According to the deal, Russia will deliver up to 40,000 tons of wheat, Agriculture Minister Alexei Gordeyev said, adding that it would be supplied from Russian state reserves and funded by a Russian loan (RIA-Novosti, July 11).

Mongolian officials also confirmed their continued interest in Russian energy supplies. “Our colleagues are interested in deliveries of oil and refining products,” Fradkov indicated in Mongolia (Itar-Tass, July 11).

In March 2005, Gazprombank, a subsidiary of the Russian state-controlled natural gas giant Gazprom, the government-owned foreign trade bank Vneshekonombank and the Czech Export Bank agreed to finance the $600 million project to build Mongolia’s first oil refinery. It is designed to refine 1.5 million metric tons of crude per year (30,000 barrels per day), while its first stage is expected to cost $350 million.

Yet despite official pledges and plans for major joint projects, Russian media outlets seem to remain skeptical. Cooperation between Russia and Mongolia has been slow, the official Rossiiskaya gazeta daily conceded on July 13.

When President Putin traveled to Mongolia in 2000, an agreement was signed to build an oil pipeline from Siberia to China through Mongolia. However, this project dropped into irrelevance as Moscow subsequently opted for the Japan-bound Taishet-Nakhodka route, with only a possible offshoot to China, not through Mongolia.

In the wake of the Soviet collapse in 1991, bilateral economic relations were overshadowed by Mongolia’s Soviet-era debt to Russia. In December 2003, the Russian government decided to write off all but $300 million of Mongolia’s 11.4 billion so-called convertible ruble debt to Russia, once valued at $11 billion. However, the debt write-off has so far failed to boost bilateral trade.