Publication: Eurasia Daily Monitor Volume: 3 Issue: 228

While visiting Russia from December 4 to December 10, Mongolian President Nambaryn Enkhbayar reiterated pledges to strengthen economic ties with Moscow. However, similar official pronouncements in the past have so far failed to generate any breakthrough in bilateral relations.

At a meeting in the Kremlin on December 8, President Vladimir Putin told Enkhbayar that Russian investments in Mongolia could reach $5 billion in the near future “if necessary conditions are created.” Specifically, “Russian companies are prepared to operate in Mongolia and commit sizable investments” in mining, energy, and transportation.

Putin also said that Russia was prepared to re-introduce a visa-free regime for Mongolia. Before 1999 citizens of both countries did not need visas for traveling to Russia and Mongolia, but seven years ago the Mongolian authorities suggested abandoning the visa-free regime.

Putin also urged Enkhbayar to raise the efficiency of Erdenet, the Ulaanbaatar railway, and Mongoltsvetmet, leading bilateral joint ventures. Modernization of these enterprises would require more than $2 billion by 2015, he said. “It is a serious task, but I think it is still realistic for our economies,” Putin said (Interfax, December 8).

As a legacy of close bilateral ties during the Soviet era, Russia still has 425 joint ventures in Mongolia, most of them small entities. But Russia holds a 49% stake in Mongolia’s major copper producer, Erdenet, the Ulaanbaatar railway, and Mongoltsvetmet. However, Russia’s profits from the three major ventures amounted to a mere $47 million in 2003-2006, while Mongolia received $427 million during the same period. In 2005 alone, Erdenet recorded $160 million in net profits.

The Mongolian president reportedly hailed the good prospects for bilateral economic cooperation. Enkhbayar said that bilateral trade should be raised up to $1 billion. He also suggested that Russian investments should bring Mongolia not only money but also new technologies. In response, Putin noted that bilateral trade was still significantly lower than in the late 1980s (Interfax, December 8).

In 2005, trade turnover between Russia and Mongolia reached $466 million, a 70% increase over 2000, according to Russian statistics. Trade with Russia accounts for roughly 20% of Mongolia’s foreign trade, while Russian petrochemical exports amount to nearly 60% of Mongolia’s domestic consumption. Russia’s trade surplus was up from $161 million in 2000 to $390 million in 2005 (RIA-Novosti, December 8).

Last July, Russian Prime Minister Mikhail Fradkov traveled to Mongolia to draft a program to develop trade for 2006-2010. Fradkov also urged his hosts to improve the efficiency of Erdenet, Mongoltsvetmet, and the Ulaanbaatar Railway joint ventures, which he described as “flagships of Russian-Mongolian cooperation.” However, Mongolia reportedly declined to sign new agreements on Erdenet and Mongoltsvetmet during Enkhbayar’s visit to Russia (Kommersant, December 8).

Since earlier this year, Russia’s major corporations have considered making sizable investments in Mongolia. At the Kremlin meeting, Putin told Enkhbayar that Russian Aluminum, Norilsk Nickel, Polimetall, and Zarubezhgeologiya were interested in developing copper, silver, gold and uranium deposits in Mongolia, particularly the sizeable Oyu-Tolgoi gold field.

Russia’s Severstal has long indicated interest in Mongolia’s Tavan-Tolgoi coal deposit in the South Gobi region, arguing that the development of Tavan-Tolgoi would raise Mongolia’s GDP by 25%. Severstal reportedly sought Putin’s backing in order to convince Mongolian authorities to develop Tavan-Tolgoi, which has estimated reserves of 5-6 billion tons valued at $300 billion. Subsequently, other major Russian companies such as BazEl and Renova shared Severstal’s interest in Tavan-Tolgoi.

On November 30 BazEl, Renova, and Severstal announced the formation of a consortium for joint development of Tavan-Tolgoi. The consortium is interested in building a modern mining facility at Tavan-Tolgoi, as well as improving the transport and energy infrastructure, the three companies said in a joint statement (Interfax, November 30). However, no agreements on Tavan-Tolgoi were announced during Enkhbayar’s visit to Russia.

Mongolia’s government appears to remain reluctant to concede more than 50% of Tavan-Tolgoi to foreign investors. In the meantime, Mongolia had received good offers from Chinese and Japanese firms, including Mitsui, Sumitomo, and Shenhua Group, seeking to develop Mongolia’s mining sector, including Tavan-Tolgoi.

When Putin traveled to Mongolia in 2000, both sides pledged to boost bilateral economic ties. In December 2003, the Russian government wrote off all but $300 million of Mongolia’s 11.4 billion convertible ruble debt to Russia, once valued at $11 billion. However, the official pronouncements as well as the debt write-off have not provided the anticipated boost to bilateral trade and investment.