Economist Mongolia will need—and fear—China
Nov 21st 2012 | from The World In 2013 print edition
It is not often one has a chance to write this: the International Monetary Fund has slashed its GDP-growth forecast for 2013 almost in half, to a paltry 12.2% (from 22.9%). Nor this: for 2012 it is now expecting growth to reach 15.1%, double its previous forecast of 7.6%. Mongolia is going through extraordinary times, offering enormous hope that this vast but sparsely populated nation of just 3m people might be on the fast track out of poverty. Yet the mood is rather bitter.
The bungee-jumping forecasts are based on the rapid progress of Oyu Tolgoi, or “Turquoise Hill”. Near the Chinese border, in the wastes of the Gobi desert, this is the largest foreign investment in Mongolia, a copper-and-gold mine that will account for one-third of its GDP. Oyu Tolgoi is just the advance guard. Behind it stomps an army of miners—of coal, silver, uranium and much else—promising to lead Mongolia into national prosperity.
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Oyu Tolgoi is due to reach full production in the first half of 2013, a year which will be crucial for the project. And, because of its importance to the Mongolian economy and as a symbol of Mongolia’s ability to carry off vast mining endeavours, that makes 2013 a crunch year for the country.
The project, however, faces two big problems—one immediate, and one that may dog it for years. The short-term difficulty is a fundamental one: the lack of electricity. This is to come from the Chinese region of Inner Mongolia. In the haggling over the sale of electricity some suspect China, which will be the market for Oyu Tolgoi’s copper, as for almost all Mongolia’s mining projects, of playing tough to extract better terms.
That suspicion is a symptom of the second, long-term, problem: “resource nationalism”. Mongolian nationalists would like to see the terms of the government’s investment agreement covering Oyu Tolgoi amended to give it a bigger share. At present it holds 34%, with the balance owned by a foreign shareholder, Turquoise Hill, which is controlled by Rio Tinto, the British-Australian mining giant that is managing the project and has put in almost all the investment ($6 billion and counting). In 2011 Rio Tinto saw off requests for the renegotiation of its agreement. It will face more.
In a parliamentary election held in June 2012 no party won an absolute majority. The Democratic Party, which helped lead the protests against the old Soviet-backed regime which fell in 1990, won 31 seats out of 76 but has been forced into coalition with smaller parties. This gives clout to the 25 members of parliament counted as “resource nationalists”. The government has backed away from threats of an immediate renegotiation of Oyu Tolgoi. But its “action plan” commits it to a
“review” of all foreign-investment agreements.
The appeal of nonsense
It is hard to imagine that the government would do something as disastrous as taking the wrecking ball to an agreement on which its hopes of prosperity are built. But Mongolian fears of being swamped by China and of becoming economically dependent on it are deep-seated. Commercially nonsensical battles with foreign shareholders have political appeal. So the background noise will not fade as Oyu Tolgoi goes into production, especially with a presidential election due in May. The issue will cloud the investment climate.
The biggest of the other projects is the Tavan Tolgoi coal mine. This was supposed to have been financed in part by share offerings in Hong Kong and London in 2012, which have been deferred. The delay also has its origins in the nationalist fear of China, which has been using its monopsonist power to bear prices down. The project will make little progress in 2013.
The heady growth of recent years has had a cultural impact. Just 20 years ago, most Mongols, even those in the capital, Ulaanbaatar, identified with their home aimag, or province, where their parents had lived in gers, felt tents, as nomadic herders. Many feel uneasy that this way of life is in decline, with the steppes despoiled by miners. Environmental degradation and the periodic dzuds—icier than usual winters often following summer droughts that leave too little grass—have populated ger districts where the poor congregate on the edge of the capital.
For these poor the inflow of foreign money means not prosperity but rising prices, unplanned urbanisation, pollution, corrupt politicians, an influx of foreigners and a sense of alienation. It is not surprising that they are drawn to “resource nationalism”. And it is hard to see the political leadership emerging in 2013 that might make them change their minds.
Simon Long: Banyan columnist, The Economist
from The World In 2013 print edition
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