Once seen as the 16th republic of the USSR, former Soviet satellite Mongolia used to be subject to a sort of derogatory humor (“Kuritsa ne ptitsa, Mongolia ne zagranitsa” – “Chicken is not a bird, and Mongolia is not across the border”). Although Mongolia had been strongly linked to the USSR both politically and economically up until the early 1990s, ties between the two former Cold War era allies have since declined. By contrast, due to the growing economic might of its southern neighbor, Mongolia’s development has been increasingly re-oriented in a way to cater to the needs of booming Chinese markets.
During the Soviet era, Mongolia was almost exclusively dependent on its northern neighbor. Moreover, the Mongolian economy heavily relied on massive Soviet loans and aid. In all, over 720 projects were built, including Darkhan and Erdenet power stations, the Baganuur, Aduunchuluun and Sharyn Gol coal mines, and over 1,000-kilometers of roads. These projects served as a cornerstone of the Mongolian economy at the time. However, in the early 1990s the abrupt loss of Soviet economic assistance dealt Mongolia a sensitive blow. Subsequently, Mongolia introduced open economic policies and liberalized foreign trade, hence achieving economic growth of some 10 percent a year. Due to the structural reforms process, now up to four fifths of Mongolia’s GDP is produced by privately-owned companies. 
Moscow has been recently seeking to revive economic ties with Mongolia. In the past few years, there have been numerous bilateral top-level meetings and official pronouncements. Russian President Vladimir Putin’s visit to Mongolia in 2000 came as one of the first foreign trips of his presidency. In March 2002, Russian Prime Minister Mikhail Kasyanov became the first head of cabinet to come to Mongolia since 1971. In June 2003, in a meeting with visiting Mongolian Prime Minister Nambaryn Enkhbayar, Putin stated that Russia attached great importance to relations with Mongolia and that he was pleased with the development of bilateral ties.
Because of close bilateral ties during the Soviet era, Russia still maintains certain economic positions in Mongolia. Notably, Russia has a 49 percent stake in Mongolia’s major copper producer, Erdenet. There are 265 smaller joint ventures in Mongolia, with combined Russian investments totaling $20 million. However, larger Russian companies in Mongolia have been struggling due to inadequate management. In November 2004, Russia’s Audit Chamber announced it had discovered irregularities in managing Russia’s state-owned 49 percent stakes in Erdenet and Mongoltsvetmet joint ventures. Notably, in 2003 Russia received no dividends from Erdenet at all and 2004 payments were seen as unlikely due to loose supervision by Russian officials, according to the Audit Chamber. Not surprisingly, Russian officials have suggested state-sponsored incentives to sustain bilateral economic ties. Last January, Sergei Mironov, speaker of the Federation Council, the upper house of the Russian parliament, told visiting Mongolian parliament speaker Nambaryn Enhbayar that state support was needed to back bilateral joint ventures in Mongolia. However, these incentives have failed to materialize so far.
In the wake of the Soviet collapse in 1991, bilateral economic relations used to be somewhat overshadowed by Mongolia’s huge Soviet-era debt to Russia. Roughly three quarters of Mongolia’s total debt was spent to fund infrastructure projects. In an apparent attempt to give bilateral ties a much-needed boost, Moscow opted to forgive the bulk of Ulaanbaatar’s debt. In December 2003, the Russian government decided to write off 98 percent of Mongolia’s state debt. In fact, Moscow wrote off all but $300 million of Mongolia’s 11.4 billion convertible ruble debt to Russia, once valued at $11 billion. However, the move seemingly came as little help to encourage bilateral trade and investment ties.
In recent years, annual trade turnover between Russia and Mongolia has been amounting to little more than $200 million (roughly one tenth of Mongolia’s foreign trade), the bulk of which were Russian petrochemical exports. Moscow’s ties with Mongolia were mainly limited to border trade of a largely local character. The Russian Siberian regions are responsible for 70 percent of Russia’s overall trade with Mongolia, including some 80 percent of Russian exports, mainly petrochemicals. In March 2005, Russian and Mongolian officials discussed issues of border trade at Kyakhta border town in Russia’s Buryatia internal republic. On March 23, they signed an agreement, pledging to boost cross-border trade and remove customs hurdles at cross-border check points. Buryatia has a 1,275-kilometer border with Mongolia. Meanwhile, as bilateral discussions dealt with cross-border trade and transit, pledges to remove customs hurdles would also serve Russia’s trade with China where the bulk of transit freight would end up.
Yet despite optimistic official pronouncements, there have been some irritants in bilateral relations between Russia and Mongolia, notably with regard to the 3,500-kilometer-long border. In the past four years, Mongolian border guards shot 17 residents of Russia’s border Tuva region, killing nine of them. The incidents reportedly involved illegal border crossing and cattle stealing.
Hydrocarbon supplies were supposed to become yet another factor in Russia’s reviving economic relations with Mongolia. When President Putin traveled to Mongolia in 2000, an agreement was signed to build an oil pipeline from Siberia to China through Mongolia. Such a project would not only secure lucrative transit fees, but also guarantee stable oil supplies for Mongolia. However, this project has seemingly dropped into irrelevance as Moscow opted for the Japan-bound Taishet-Nakhodka route, with only a possible off-shoot to China. Furthermore, now some Russian crude oil exports to China by rail go through Mongolia. Guennady Fadeyev, head of Russia’s railway monopoly OAO RZD, has said that Mongolia was viewed as a bottleneck in terms of this export route. Therefore, Mongolia is seen by Russia as a transit route rather than a trading partner. 
Russia also has an interest in Ulaanbaatar’s railway, once the major supply route for Soviet aid shipped to Mongolia. In 2004, the Ulaanbaatar railway funneled some 4.5 million tons of transit freight, mainly between Russia and China.  Moreover, Russian domestic issues, notably the Yukos affair, have affected economic ties with Mongolia. As Yukos halted deliveries of diesel fuel and gasoline, Mongolia had no other choice but to buy oil products from Kazakhstan. In December 2004, Kazakh refineries stepped in to replace Yukos as a predominant supplier of oil products to Mongolia. Subsequently, now Mongolia seems to be seeking ways to secure independence from Russian fuel supplies.
Not surprisingly, Mongolia has been increasingly oriented toward ballooning China’s markets. Now Mongolia’s major trading partner is China. Almost half of the country’s exports went to China and a quarter of its imports were from China in 2004. Mongolia also wants to attract mining firms, as well as companies to build roads and railways, as the country’s Trade Minister Sukhbaatar Batbold recently announced. Presumably, minerals are to be mined and processed for subsequent export to China, while new roads and railways are needed to funnel freight south. To achieve this goal, Mongolia’s government has said it will offer tax breaks to international majors such as BHP Billiton and Mitsuito to attract investment in coal and copper deposits. South Gobi holds a 6-billion-metric-ton coal deposit, or it is believed to have enough reserves to supply neighboring China for three years. Chinese mining companies are also said to be keen to establish themselves in Mongolia.
On the other hand, international companies are presently tapping Mongolia’s strategic deposits, once discovered for the needs of the Soviet “big brother.” For instance, Canada’s UGL Enterprises Ltd. has bought the 2,500-hectare Maikhan uranium deposit in northeastern Mongolia, first identified by former Soviet geologists. Due to obvious geographic considerations, these important deposits could also cater to the needs of China’s energy markets.
With a backdrop of growing trade ties with China, Mongolia is seen as willing to be part of groupings that China is in, including the UNESCAP Bangkok Agreement, soon to be renamed the Asia Pacific Trade Agreement (APTA). The first ministerial session of the APTA is to be in Beijing. Mongolia has also joined the Conference on Interaction and Confidence Building Measures in Asia (CICA), as well as the ASEAN Regional Forum on security. The country reportedly aims at joining the Asia-Pacific Economic Cooperation (APEC) grouping, and has also moved to develop ties with the Shanghai Cooperation Organization (SCO). The SCO, which includes China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan, has granted Mongolia observer status. Moreover, there have been indications that Mongolia would seek full membership in the SCO. Due to current economic realities, the SCO is arguably destined to be dominated by China rather than Russia. Therefore, membership in this grouping could give Ulaanbaatar further incentives to forge closer ties with Beijing.
Against this background, Mongolia’s southward economic and political drift is likely to continue. Sandwiched between Russia and China, landlocked Mongolia has hardly any other viable economic option but to drift away from Russia toward China. Meanwhile, the legacy of the Soviet experience could sustain ties between Russia and Mongolia at a certain level, but bilateral economic or political breakthroughs are understood to be unlikely in the long-term.
Prior to working as Moscow-based independent researcher and journalist, Dr. Sergei Blagov was a newswire reporter. He spent nearly seven years reporting from Hanoi, Vietnam, between 1983 and 1997.
1. Luvsandagva Amarsanaa, Extraordinary and Plenipotentiary Ambassador of Mongolia to China (Kazinform interview, March 30): Last year its economic growth reached 10.6 percent. The government carries out open economic policy and widely liberalizes foreign trade. Up to 80 percent of GDP is produced by privately-owned companies thanks to denationalization and structural reforms process.
2. RIA-Novosti, Nov.24.
3. Ulaanbaatar’s railway was launched in June 1949 as a 50×50 joint venture. Since July 2004, Russia’s 50 percent stake in Ulaanbaatar’s railway (AO UBZhD) is managed by Russia’s Federal Railway Transport Agency, according to the government’s decree No 397.