Publication: Eurasia Daily Monitor Volume: 3 Issue: 50

Russian banks have announced plans to fund a major refinery project in Mongolia. The oil refinery will not only process Siberian crude, but it is also designed to cater to the needs of the Chinese market.

A group of Russian and Czech banks have signed an agreement to finance the construction of Mongolia’s first oil refinery, according to a joint statement issued earlier this month. 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.

Mongolia’s first oil refinery is designed to process 1.5 million metric tons of crude per year (30,000 barrel per day), while its first stage is expected to cost $350 million. Russia and Czech suppliers are expected to supply equipment for the project. The oil refinery is intended to process crude for Mongolia’s domestic needs and to export surplus amounts to the Northern provinces of energy-hungry China (RIA-Novosti, March 7).

The refinery project is also supposed to deal with some lingering consequences of the Yukos affair, which affected economic ties with Mongolia. As Yukos halted deliveries of diesel fuel and gasoline in late 2004, Mongolia had no other choice but to buy oil products from Kazakhstan. In December 2004, Kazakh refineries stepped in to replace Yukos as the predominant supplier of oil products to Mongolia. The new refinery in Mongolia is supposed to alleviate the need for imports from Kazakhstan.

Russia had previously announced an even more ambitious vision for Mongolia as an economic gateway to China. When President Vladimir Putin traveled to Mongolia in 2000, an agreement was signed to build an oil pipeline from Siberia to China through Mongolia. However, this project was pushed aside when Moscow subsequently opted for the Japan-bound Taishet-Nakhodka route, with only a possible offshoot to China. Russia also has smaller China-oriented projects involving Mongolia. For example, Russia’s Altai region plans to build the Tashanta-Taikishken road to China through the Mongolian towns of Ulgii and Kobdo by 2009. However, Oleg Mitvol, deputy head of the Russian environmental watchdog Rosprirodnadzor, told a press conference in Novosibirsk on February 16 that the road should not harm the environment of the Ukok highland (Regnum, February 17).

Mongolia appears to be a logical option as an economic gateway to China, because during the Soviet era Mongolia was almost exclusively dependent on its northern neighbor. With a legacy of close bilateral ties, Russia still has more than 200 joint ventures in Mongolia; the Erdenet plant and Ulaanbaatar railway top the list. Russia has held a 49% stake in Erdenet, Mongolia’s major copper producer, and the Mongoltsvetmet joint ventures.

The Mongolian government appears willing to sustain economic ties with its northern neighbor, including Soviet-era joint ventures. On February 17, a Mongolian Cabinet meeting decided to extend the agreement on Mongolrostsvetmet, which had expired on January 1, until the end of 2006.

In the wake of the Soviet collapse in 1991, bilateral economic relations were overshadowed by Mongolia’s huge Soviet-era debt, now held by Russia. In December 2003, the Russian government decided to write off 98% — all but $300 million — of Mongolia’s 11.4 billion convertible-ruble debt to Russia, once valued at $11 billion.

Despite the close proximity Moscow has hardly viewed Mongolia as a foreign trade priority. Later this year, Russia plans to shut its trade representative mission in Mongolia, while it plans to open eight new trade missions in former Soviet states (RIA-Novosti, February 28).

Russia appears to view economic ties with Mongolia mainly in terms of border trade of a largely local character. The Russian Siberian regions are responsible for nearly three-quarters of Russia’s overall trade with Mongolia, including some 80% of Russian exports, mainly energy and petrochemicals.

Subsequently, most bilateral economic deals are also locally oriented. For example, on February 16, the Chita power company Chinaenergo and Mongolia’s Eastern Aimak power company clinched a deal on electricity supply from Russia.

Irkutsk region, which borders Mongolia, is responsible for some 60% of Russia’s overall trade with Mongolia, and former Irkutsk region governor Boris Govorin has emerged as Moscow’s expert on Mongolian affairs. Not surprisingly, Govorin has just been appointed Russian ambassador to Mongolia.

There have been some minor security irritants in bilateral relations. In the past four years, Mongolian border guards have shot more than 20 residents of Russia’s border Tuva region, killing nine of them. To deal with the problem, on February 13 Russian and Mongolian border guard officials signed an agreement in Kyakhta on combating trans-border crime, notably smuggling, theft, and border violations.

However, neither state is seemingly anxious to revitalize bilateral military ties, hence Mongolia is seeking assistance in maintaining its Soviet-supplied arsenals elsewhere. For example, Mongolia dispatched a team from its Ministry of Defense, headed by coordination department chief Lhundev Batsengel, to Ukraine February 28-March 2 and to Belarus March 2-4 to discuss military cooperation and personnel training.