Publication: Eurasia Daily Monitor Volume: 5 Issue: 78

Moscow has renewed efforts to prop up economic ties with its closest Cold War era ally, Mongolia. The two neighboring nations appear, however, to remain divided by a variety of irritants.

At a meeting in Moscow with Mongolian Prime Minister Sanjaa Bayar earlier in April, Russian President Vladimir Putin pledged to increase bilateral trade to $1 billion. Putin also praised Mongolia’s major copper producer Erdenet, Ulaanbaatar railway and MongolRosTsvetmet, in each of which Russia holds a 49 percent stake. These three major joint ventures produce about 20 percent of Mongolia’s GDP (Interfax, ITAR-TASS, RIA-Novosti, April 11).

In response, Bayar thanked Putin for supplying 100,000 tons of grain on preferential terms in 2007. On April 10 Russia Minister of Agriculture Alexey Gordeyev pledged to supply Mongolia with 50,000 tons of grain this year, exempt from Russia’s 40 percent export duty. In 2007 Gordeyev was appointed a presidential envoy for economic ties with Mongolia.

In 2007 trade between Russia and Mongolia amounted to about $670 million, up some 28 percent from the previous year, according to Russian customs statistics. Other Russian estimates, however, put the figure at $790 million. In 2006 bilateral trade reached some $500 million or nearly 75 percent up from 2000.

When Putin traveled to Mongolia in 2000, both sides pledged to boost economic ties. Since the Soviet collapse in 1991, bilateral economic relations had been overshadowed by Mongolia’s Soviet-era debt to Russia. In December 2003, the Russian government decided to write off nearly all of Mongolia’s debt to Russia, once valued at $11 billion. The debt write-off has proved too slow, however, to boost bilateral trade and investment.

During the Soviet era, the Mongolian economy relied heavily on massive Soviet loans and aid. In all, over 700 projects were built, including more than 600 miles of roads. During his Moscow trip, Bayar also suggested modernizing the Ulaanbaatar railway and turning it into a modern rail link. He dismissed rumors that Mongolia was considering upgrading its railway network to Western standards and relying on U.S. aid (Interfax, April 11). In late 2007 Russia’s Gazprombank indicated a tentative interest in a $1.5 billion project to modernize the Ulaanbaatar railway.

Meanwhile, Mongolia has been relying on international funding to develop transport links with both Russia and China. The Asian Development Bank (ADB) agreed to a $38 million grant to fund in part a road project linking western Mongolia to Russia and China. The $200 million project would include a 197-mile link from Mongolia’s western Hovd province to Russia and 268 mile road to China (Xinhua, April 18).

Moscow has also discussed nuclear cooperation with Mongolia. On April 10 Sergei Kiriyenko, head of the Russian state-run Nuclear Power Corporation Rosatom, met Bayar and pledged to develop uranium mining in Mongolia. Kiriyenko also promised Mongolia eventually to build nuclear power plants.

Uranium deposits in northeastern Mongolia are close to Russia’s largest uranium producer, the Priargunsky mining complex. Mongolian experts have estimated the country’s uranium deposits at 60,000 tons, while Russia’s Rosatom put the number at more than 100,000 tons.

The Mongolian media hailed Russia’s nuclear overtures. Mongolia’s uranium deposits, combined with Russian and Japanese nuclear capabilities, could potentially transform the nations of Asia into the greatest nuclear power bloc the world has ever seen, the Mongolian media claimed (The UB Post, April 17).

At a meeting in Moscow with Bayar on April 11, Russian Prime Minister Viktor Zubkov said that Russia’s Rosatom, RZD, BazEl, Severstal, Renova and Gazprombank remained interested in Mongolian projects. Bayar conceded in response that the Mongolian parliament was slow to adopt new mining legislation, thus hindering creation of new mining joint ventures with Russia.

Russia’s major companies have long indicated an interest in Mongolia’s Tavan Tolgoi coal deposits in the South Gobi region with estimated reserves of five to six billion tons. In November 2006 BazEl, Renova and Severstal announced formation of a consortium, aimed at joint development of Tavan Tolgoi, but no agreements have been concluded so far.

The Mongolian-Russian joint venture MongolRosTsvetmet made a tentative deal with Polymetal on the Asgat deposit in December 2006. The agreement sparked some domestic controversy, however, and the Mongolian government had to cancel it in January 2007.

Subsequently, some Russians were critical of Mongolia. In a letter to the Russian Foreign Ministry, Viktor Ilyukhin, deputy of the Russian State Duma, the lower house of parliament, claimed that the Mongolian government pursued anti-Russian economic policies. Mongolia’s taxation of so-called super-profits cost Erdenet $400 million in 2007, with Russia thereby losing nearly $200 million in a clear violation of the bilateral investment protection agreement ratified in 2006, he wrote. He warned against continued grain and energy supplies on preferential terms, unless Mongolia exempted Russian companies from its taxation of super-profits (Interfax, April 11).

Subsequently, Russian analysts opted to explain economic setbacks by outside meddling. Americans aim to set up military bases in Mongolia and Central Asia so as to push Russia out of the region, argued General Leonid Ivashov, head of Geopolicy Academy, Moscow-based think tank. Mongolia is also important for the United States as it borders China, he said (Interfax, April 11).

Washington might want to build surveillance facilities in Mongolia to monitor Russia, China and Kazakhstan, claimed Anatoly Tsyganok, head of the Moscow-based Center of Military Forecasting. In the interests of its own security, Russia should revive its military cooperation with Mongolia, he said (Interfax, April 11).

Although landlocked and sandwiched between Russia and China, some politicians and analysts in Moscow seem to suspect the Mongolian leaders of plans to drift farther away from Russia. Meanwhile, the Kremlin’s efforts to engage Mongolia by economic means have been producing mixed results.