Oyu Tolgoi dispute during this session Oct 01/14 - Feb 10/15 Indicators point to improved prospects for resolution of Mongolia's Oyu Tolgoi dispute but underlying risks persist
Published: 9/30/2014
Announcements from the companies involved and the government point to a renewed will on both sides to move forward with the second phase of the Oyu Tolgoi mine.
| IHS perspective | |
| Significance | Earlier this month, Turquoise Hill Resources announced the completion of a new feasibility study for the second phase expansion of the Oyu Tolgoi copper-gold mine, estimated by the Rio Tinto subsidiary to contain 2.7 million tonnes of copper, as well as progress on a tax dispute. |
| Implications | These two previously identified indicators increase the likelihood of a resolution of the dispute between the government and Rio Tinto about the scale of the latter's investment in and control over the project. The resolution of the dispute would be likely to prompt an increase in FDI and the expansion of the Oyu Tolgoi mine would have a transformative effect on the country's economy. |
| Outlook | The government has called for the dispute to be resolved between October this year and February 2015, which is a realistic timescale. However, the risk of government instability and capacity and co-ordination issues within the Mongolian bureaucracy are likely to push a resolution of the dispute towards the end of this timescale. |
Positive indicators reflect changing attitudes among political leadership and public
The motivation behind the tax authority's decision to present Oyu Tolgoi LLC with the tax bill earlier this year, during the sensitive negotiation process over the second phase of the project, remains unclear. IHS sources in Ulaanbaatar, discussing the issue earlier this month, tended to reject the theory that the tax dispute was engineered by the Mongolian government as a way of strengthening its bargaining position in the broader dispute. Instead, one source noted that many foreign companies were being presented with relatively small tax demands following audits by the tax authorities as a way of generating increased revenue. It is possible that rather than being specifically targeted, Oyu Tolgoi was one of many companies being targeted this way and it simply received more attention given its prominence. Another source believed that the audit was initiated at the unofficial direction of one of Prime Minister Norovyn Altankhuyag's opponents with the aim of embarrassing him at a time when the delay in moving ahead with the project is a key political issue. Both explanations are plausible in the Mongolian context and although neither can be independently corroborated, they share an underlying assumption that is important to understanding the Mongolian business environment. This is that the lack of co-ordination between state agencies, ministries, and politicians can lead to delays and disputes emerging even when the top political leadership firmly support a project, as well as creating the opportunity for the politicisation of state agencies.
In general there has been a shift in attitudes towards foreign investment, and Oyu Tolgoi in particular, among the population and the political class. In an 8 September address, Altankhuyag explicitly connected the politicisation of foreign investment with the depreciation of the Mongolian currency and the consequent rise in the cost of living. A survey of public opinion in Mongolia published in April showed that 20.8% of respondents identified inflation as the main issue that concerned them, up from 14.6% the year before. As such, it is unlikely that the 2016 election campaign will see a repeat of the last election campaign in 2012, when Mongolian parliamentarians rushed through the Strategic Entities Foreign Investment Law (SEFIL), a piece of legislation which contributed to the sharp downturn in foreign investment and which senior Mongolian policymakers now openly describe as a mistake.
Outlook and implications
The reduction in the tax bill and the completion of the feasibility study suggests that the prospects for a resolution of the Oyu Tolgoi dispute have improved since the tax dispute emerged in June. This dispute has come to define Mongolia's reputation as a destination for foreign investment. Resolving it would mark the first step towards restoring confidence in Mongolia. Conversely, the longer the dispute persists the greater the long-term negative impact on Mongolia's investment environment is likely to be.
In June, IHS assessed that the end of September was the earliest likely date for a resolution to the dispute. The next session of the Mongolian parliament begins on 1 October and is due to run to 10 February 2015. Prime Minister Altankhuyag stated on 8 September that his government would resolve the Oyu Tolgoi dispute during this session. The Lunar New Year festival, Tsagaan Sar, commences in mid-February and if the dispute has not been resolved before this it is likely that the festivities will preclude any movement on the government side for several weeks. However, given ongoing factional infighting within the ruling party and its coalition partners, and the capacity and co-ordination issues within the government bureaucracy, there is a significant risk of further, unexpected delays to a resolution of the dispute emerging. In this context, an absence of major public statements from either side over the next several weeks would, counter-intuitively, be a positive indicator for the resolution of the dispute.