Monday, July 25, 2011

NEWS: Mongolia Prepares for Flood of Money

Mineral-Rich, People-Poor Mongolia Prepares for Flood of Money Next Decade
Original story posted by Bloomberg News - Jul 21, 2011

Sunset over Ulaanbaatar
Hurrying into her cramped office deep within Mongolia’s huge Soviet-era Government House, Parliament member Sanjaasuren Oyun, 46, is flushed with excitement, a smile creasing her usually serious face.

She hands papers to her young female assistant and exchanges some quick words in the low guttural murmur of Mongolian. Dressed in a pinstriped suit, with a pearl necklace, hair cropped to a business-like shoulder length, and an iPad tucked under her arm, she turns to a waiting reporter.

“Sorry to make you wait,” she said, switching smoothly to English, which she picked up as a student at Cambridge. “It’s an important debate we are having today. We are considering a freeze on new exploration licenses.”

Outside, it’s a still-chilly, late-May afternoon in Ulaanbaatar, no sign of green along its potholed dirt roads. But the capital city of about 1 million people is already being transformed by forces greater than the change of seasons, Bloomberg BusinessWeek reports in its July 25 edition.

A freeze on licenses to explore for minerals is no small matter in Mongolia, a country undergoing a resources boom, as miners such as London-based Rio Tinto Group and China’s Shenhua Group compete for the right to extract coal, copper, gold, molybdenum and uranium.

It’s a resource play that’s expected to bring a flood of money into the impoverished country over the next decade, centered around huge mining projects such as the Shivee Ovoo and Tavan Tolgoi coal reserves, valued at about $300 billion and $400 billion, respectively, and the copper and gold mine Oyu Tolgoi, worth some $300 billion, according to Quam Asset Management Ltd. in Hong Kong, which runs a Mongolia-focused investment fund.

Wealth, Wise Use

Oyun is at the center of the country’s efforts to pick its way between wealth and wise use. She is a geologist who once worked for the biggest investor in Mongolia’s mining industry, Rio Tinto, yet she has made a career pushing for the rights of ordinary Mongolians and fighting corruption.

She is also part of the nation’s young democratic history. On the wall in her office is a picture of her brother Zorig, a member of Parliament who seemed on his way to becoming prime minister when he was killed in 1998. His murder is still unsolved.

Investor Talks

On the Parliament floor, members are demanding that the Mineral Resources and Energy Minister Dashdorj Zorigt step down for his handling of negotiations with foreign investors.

“The situation is a bit different from before,” Oyun says, gesturing at a television broadcasting the debate. “When we made our first mining legislation in 1997, we were desperate to attract investment, but no more. We can be more demanding.”

She acknowledges that the politicians may be grandstanding, aiming to embarrass rivals in the run-up to 2012’s presidential elections. The energy minister didn’t step down, though the freeze on new licenses has been extended through 2011.

The discussion about ensuring Mongolia benefits from its resources is a struggle that pits nomadic herdsmen and environmentalists against well-connected players such as Prime Minister Sukhbaatar Batbold and Baasangombo Enebish, executive director and chief executive officer of coal company Erdenes MGL, as well as global resource giants such as Rio Tinto and Peabody Energy Corp. (BTU)

Mining Protest

Oyun realizes it’s time to meet her daughter and rushes outside, where her driver waits with the 5-year-old.

As the car pulls out around Sukhbaatar Square, in front of Parliament, Oyun points out an ongoing protest: Three round felt tents, known as “yurts” or “gers” in Mongolia, have been set up at the far end of the square. Their occupants are demanding the government close the mining industry to foreign companies.

“The gentleman who organized this protest has become something of an extremist --- I’m not sure that’s the right word,” she says, referring to Tsetsgee Munkhbayar, a former herdsman turned environmentalist.

“He fired guns near mining equipment last year and now says he and his followers may have to take up arms against the government,” she continues, frowning. “He is a resource nationalist. But here in Mongolia we need to strike a balance. How to be sensible but also populist -- yes, we face this tension.”

Mongolia is empty and remote, perhaps one reason Genghis Khan -- or Chinggis Khaan as his name is spelled locally in English -- set out to take over most of Eurasia eight centuries ago.

Desert, Steppe

On the two-hour-plus flight north from Beijing, the blankness of the Gobi Desert dominates before becoming the sweeping yellow and green of the steppe, then finally long ranges of treeless mountains as the plane approaches Ulaanbaatar. Other than the broad changes in landscape below, little else is seen. There are no buildings, no roads, no people, no trees, nothing much at all, really.

Squeezed between China and Russia, and equal in size to western Europe, Mongolia has just 2.8 million people, making it one of the most sparsely populated countries in the world, notwithstanding the livestock.

Mongolia’s National Statistical Office estimates there are 33 million head of livestock in the country, including goats, sheep, horses, cattle and camels. More than a third of Mongols live in the rundown capital, while about a quarter are still semi-nomadic, living in gers and moving their herds along with the seasons.

Mineral Riches

While it may be short on humans, Mongolia is one of the richest nations in terms of natural resources, and that’s just the known deposits. Four-fifths of the country is still unsurveyed. Over the next decade, copper production is expected to double, iron ore to triple, coal to grow by six times, and gold and oil by 10 and 13 times, respectively.

Much of that growth will be driven by demand from China, predicts Eurasia Capital, an Ulaanbaatar-based investment bank that focuses on Central Asia and Mongolia.

The biggest prize is Oyu Tolgoi -- or Turquoise Hill -- named after the color of copper oxide as it seeps from the ground, and one of the largest deposits of copper and gold.

Situated deep in the Gobi Desert, it’s just 80 kilometers (50 miles) from China’s northern border. Canadian company Ivanhoe Mines Ltd. and Rio signed an agreement with Mongolia to develop it in 2009 after the project developer Ivanhoe tried for more than six years to reach a mining accord. Rio last month agreed to increase its stake in Ivanhoe to 46.5 percent.

Burnt in Effigy

Securing the deal wasn’t easy; disputes over how much control Mongolia should cede to the foreign miners led to bitter negotiations as well as protests where effigies of Ivanhoe’s founder Robert Friedland and then President Nambaryn Enkhbayar were burnt. It was “readily acknowledged” that participants in the demonstrations were paid to parade, Ivanhoe Capital Corp. spokesman Bob Williamson said.

“It is one of the flagship projects that Rio has,” said Cameron McRae, president and CEO of Oyu Tolgoi LLC, in his expansive office in the Monnis Tower, one of Ulaanbaatar’s new high-rises. With an expected $6 billion in annual revenue from the mine, “it gives the copper group the opportunity to move into one of the top three in the world,” McRae said.

Oyu Tolgoi employs close to 3,000 Mongolians. By early 2013 the company plans to invest $7 billion, including building 100 kilometers of road from the mine to the Chinese border, an 85- kilometer pipeline to bring water to the operation, a 180- kilometer transmission line, and eventually a power station that may cost $1.5 billion.

Supercharging Economy

“We are very aware this is transforming Mongolia’s economy,” says David Paterson, vice president for regional development and communications at Oyu Tolgoi, also noting that capital spending on the project’s first stage alone is equal to Mongolia’s annual gross domestic product.

Simply getting ready to mine is supercharging the tiny economy. GDP grew 6.1 percent last year and was up 9.7 percent in the first quarter of 2011 from a year earlier.

“The mining sector could very well carry Mongolia for the next 50 years,” says Parmeshwar Ramlogan, the Ulaanbaatar-based resident representative for Mongolia at the International Monetary Fund.

Ramlogan predicts Mongolia could grow at double-digit rates for at least the next 10 years, raising per capita income -- now at $2,470 -- fourfold within a decade and making it one of the fastest-growing economies in the world.

Transforming Economies

“There is a time in these transforming economies when normal economic growth goes out the window,” says Richard Harris, CEO of Quam Asset Management. “It’s like a geological fault that the economy goes through. You are talking about a nomad or shopkeeper in a small town who suddenly becomes a truck driver or a miner. And he goes from earning a few dollars a day to a few dollars an hour. Then you see the economic changes that go with that.”

Policy makers in Mongolia have created a so-called human development fund in large part through prepaid taxes from foreign investors in the Oyu Tolgoi mine, and it doles out 21,000 tugriks ($17) to every Mongolian once a month.

Government negotiators are also demanding that the foreign companies that will develop part of the Tavan Tolgoi mine, which holds an estimated 6.4 billion metric tons of coal, pay their taxes early. Plans call for listing shares in the other half of the project in London or Hong Kong, then granting 10 percent of them to Mongolians, making every citizen a shareholder.
Years of Neglect

No place is likely to change as much as Ulaanbaatar. Mongolia was a satellite state of the Soviet Union from 1921 to 1990, and the years of neglect are still evident in the capital, with block after block of battered-looking cement residential buildings lining rutted roads.

A statue of Lenin still stands in front of the Ulaanbaatar Hotel, built in 1961 to house visiting dignitaries from the Soviet bloc. Oyun’s grandfather, a Russian explorer, geographer and ethnologist who spent 26 years in Mongolia, was forcibly returned to the Soviet Union in 1939 and died there in a gulag in 1942. His family never learned the nature of his “crime.”

Already high-rises are springing up around Sukhbaatar Square. Louis Vuitton, Emporio Armani, Burberry and Ermenegildo Zegna boutiques vie for attention in the blue-glass Central Tower on the southeastern edge of the square.

In the Monet Restaurant, on the building’s 17th floor, businessmen in expensive suits dine on Norwegian salmon and Australian prime beef, finishing with a platter of Gouda, Camembert and Roquefort cheeses with wild blueberry crackers.

A bottle of Mouton Cadet Reserve Sauternes can be had for 135,000 tugriks ($108) while diners gaze over the square and beyond to the distant new sports stadium, built with Chinese money.

Irish Pub

At night a wilder side emerges in places such as Seoul Street’s Grand Khaan Irish Pub, known for its hamburgers, beer and occasional fistfights, and in the city’s numerous strip clubs.

In the notorious Marco Polo Club, Australians and Americans working for mining-equipment companies mingle with visiting European investment bankers, drink Chinggis Khaan-brand vodka mixed with Red Bull, and watch topless Mongolian women pole dance.

Harris Kupperman, 30, runs his own hedge fund, Praetorian Capital Management, based in Miami Beach. On a trip through North Asia last August, he was struck by the economic potential of Mongolia. He’s bought a house in the high-end neighborhood of Zaisan with views over Ulaanbaatar. In February he started the Mongolia Growth Fund, raising $36.6 million.

New York Vibe

“All it takes is for you to put your feet on the ground here, you can feel the energy everywhere,” he said. “It’s unlike anywhere in the world in terms of sheer energy, apart from New York and maybe Hong Kong.”

Kupperman has started an insurance company and plans to buy, renovate and rent the dilapidated Soviet-era apartments that fill the core of the capital. After looking at other resource economies such as Qatar, Dubai and Kazakhstan, Kupperman and his partners concluded that real estate and finance are two industries that flourish in mineral boom economies, but without the capital costs and political risks of mining.

Sipping on a Heineken in the View Lounge, a stylish bar on the rooftop of the 11-story boutique Corporate Hotel, Kupperman notes that he’s not the only investor in town.

Dazed and Confused

“You go out on the street any day at noon and you will see dazed and confused hedge-fund guys walking around, with a Mongolian as a guide, with dust all over their $1,000 shoes. And you know they are thinking, [how can I] invest in this country?”

Mongolia continues to court start-up money. When Prime Minister Batbold went to China in June, Mongolia’s President Tsakhia Elbegdorj was in the U.S., visiting, among other places, the offices of Bloomberg Businessweek.

Elbegdorj, 48, is a former journalist and two-time prime minister. Like many of the parliamentarians making decisions about the country’s future, he studied abroad. He has a master’s degree in public administration from the John F. Kennedy School of Government at Harvard.

On his June 17 visit he noted that Mongolia is planning to issue dollar-denominated bonds “in the near future” to finance expansion of the mining industry and build roads and bridges. It has yet to do so.

Oyun is a technocrat in her own right. In 1992, as a student majoring in geology at Cambridge, she flew with a prospecting team organized by Rio Tinto deep into the Mongolian desert to examine the potential of Tavan Tolgoi, then an undeveloped mine. Oyun graduated from Cambridge in 1996 with a doctorate in earth sciences and joined Rio Tinto in Newbury, England, at the branch then responsible for new projects.

Stabbed to Death

In October 1998, one day after returning to England from a one-month trek in the Tianshan Mountains of Kyrgyzstan, Oyun received a call at two in the morning from a Mongolian colleague working in Rio’s Ulaanbaatar office. Her brother Zorig, then infrastructure minister in the government, had been stabbed to death in his small apartment in the capital, just before an election that would have likely made him prime minister.

In an interview just before his death, Oyun recalls, “he said he was very worried that vested interests were taking precedence over the national interests of Mongolia.”

Russian Mafia

According to Oyun, many Mongolians are convinced that her brother’s unsolved murder was a politically motivated assassination, possibly involving Russian mafia interested in the country’s then-largest coal mine, Erdenet.

Days after Zorig’s murder, Oyun returned to Mongolia for his funeral.

“There was this outpouring of public grief that, even for me, was overwhelming to see,” she remembers. She moved back to Mongolia to begin a political career, founding Civic Will, an opposition party.

Since 2009 the country has been governed by a “Grand Coalition” of the Mongolian People’s Party and the Democratic Party. Civic Will’s platform in large part centers on fighting corruption, especially the growing influence of money in Mongolian politics.

“I entered politics in 1998 because of my brother’s murder,” Oyun says. “I didn’t join either party because I didn’t find support from either of them for clean politics.”

Oyun is fixated on transparent and clean governance, concerned that the new money will be siphoned off through corruption.

Corruption Concern

Transparency International, a corruption watchdog, last year rated Mongolia in the bottom third of 178 countries, putting it on par with Mali and Mozambique.

Of particular concern are the close links between government and large businesses. A “majority of the 76 MPs have significant commercial interests in a range of sectors,” London-based risk consultants Exclusive Analysis said in a 2009 report on Mongolia.

“People are obsessed with money,” said Tsetsgee Munkhbayar, 45, organizer of the protest in Sukhbataar Square. With a face brown from years in the sun, Munkhbayar usually dresses in traditional Mongolian garb: a deel, the long robe generally worn with a sash, and a rounded, pitched helmet-like hat.

“The traditional Mongolian perspective of loving nature and mother earth is being forgotten,” he said. As a people we are at a dead-end. We must get ourselves away from the idea that economics is everything and that economics will save us.”

Fire Nation

Munkhbayar heads a coalition of environmental and nationalist groups called Fire Nation, which organizes protests against the rush to develop the mineral economy. Self-trained in environmental legislation, he hands out copies of the national mining law to a visiting reporter. Frustrated by what he says is the mining industry’s tendency to ignore land protections, Munkhbayar and others have taken to violent civil disobedience.

Last September, Munkhbayar was part of the group that fired bullets into mining equipment owned by Canadian and Chinese companies that he says were breaking the law. While he claims no employees were directly threatened, he says without remorse that the incident was intimidating as staff “ran or tried to get out of the way.”

On June 3, Munkhbayar led a group of about 50 horsemen into the center of the city where they shot arrows at Government House. They were protesting the lack of official response to calls for a national referendum to elect a new government.

‘Bribing Officials’

Munkhbayar does much of his work out of a small office in Ulaanbataar’s Sukhbaatar district, where on a May visit two volunteers are tapping on ancient, generic computers. Camping gear, including traditional Mongolian wooden saddles, is piled against one wall. His wife and 8-year-old daughter, youngest of four children, watch a tiny television.

“International corporations are bribing our government officials so they can take over Mongolia,” Munkhbayar said. “People should stop buying stocks from international mining companies that are involved in exploiting Mongolia. Instead of spending money to buy stocks they should use that money to help movements like ours.”

With a national election looming next year, some financiers and politicians fear Parliament could take a few pages from Munkhbayar and vote in policies that might damp economic growth. It has happened before.

Since leaving the Soviet Union, Mongolia has zigzagged between privatization and nationalization. In the mid-1990s, Mongolian politicians, inspired by Newt Gingrich, even wrote a “Contract with Mongolia.” Later, populist calls to nationalize industry coincided with the passage of the highest profits tax on gold and copper in the world. It was repealed two years ago.

Swing to Populism

As commodity prices rise, Mongolia may be swinging back toward the populists.

Despite passing a stringent fiscal stability law last year, requiring that the deficit not exceed 2 percent of the budget, the government plans to run up a deficit more than four times that amount this year. That may bring inflation into double digits and drive up the value of the tugrik, making non-mineral parts of the economy, such as Mongolia’s cashmere industry, less competitive.

It could also bring on the so-called Dutch disease, says Rogier van den Brink, lead economist for Mongolia at the World Bank. That’s when the discovery of natural resources leads to the decline of a country’s manufacturing industries.

“It is always very tempting for government and politicians to say we are rich,” says van den Brink. “The only problem is, it’s still in the ground. So let’s spend all this money in advance. That puts fuel on the fire of an already overheating economy.”

Policy Extremes

It’s true Mongolia has veered between policy extremes, concedes Oyun, now sitting in the second-floor office of the Zorig Foundation, in an old, high-ceilinged building next door to Mongolia’s Foreign Ministry -- where Oyun served as minister from 2007 to 2008.

A large map of Mongolia covers much of one wall, next to an assortment of five photos of Zorig, including one of him perched on a supporter’s shoulders addressing crowds during a 1990 protest. Student volunteers wander in to ask Oyun about her schedule for the next week.

“If we stick to the golden middle -- if we stick to the main international trends of doing business and having good governance -- not going to either the right or left extremes, then we don’t have to be what economists call the darling of the ultraliberals in the West, but we don’t have to introduce the highest windfall tax in the world either,” she said.

“There is finally, after 20 years, a real opportunity for Mongolia to grow, and to create jobs and income for the population. I can’t expect us politicians to be clever, but if we don’t come up with stupid decisions, then we should be fine for at least the next few years,” she said with a laugh.

“As Genghis Khan apparently said, it’s easy to ride on a horse and conquer a country, but much more difficult to get down from the horse and run it.”