Mongolia, coal and inflation

WASHINGTON, May 14 (UPI) -- Rising fuel and food costs are hitting Mongolia hard, with foreign investors exploiting the situation to pressure the country to open up its economy. Given the country's political isolation, sandwiched between China and Russia, its two major trading partners, Ulaanbaatar is being held over the proverbial barrel in negotiations with its giant neighbors, leaving its population of 2.9 million nervously awaiting further aftershocks from rising inflation.

While Mongolia's economy traditionally has been based on herding and agriculture, the country's extreme climate hobbles economic development. Besides "severely continental" weather with long, exceptionally cold and snowy winters, the country has suffered from drought over most of the last decade, while mining degrades the environment.

But the country has few options, as Mongolia's minerals are its major export asset. The nation contains vast undeveloped deposits of coal, copper, molybdenum, tungsten, phosphates, tin, nickel, zinc, fluorspar, gold, silver and iron. Mining remains the most important branch of the national economy, and foreigners are attempting to acquire assets at fire-sale prices. Rising inflation combined with inequitable commercial agreements is producing rising discontent.

To give but one example, over the last two months Russia's Rosneft, which supplies more than 90 percent of Mongolia's oil, has increased oil prices to Mongolia by 14 percent to 26 percent. The company has offered price reductions in return for concessions to operate 100 gas stations in the country.

But Russian buccaneers are not the only foreign capitalists interested in Mongolia's mineral reserves. Tethys Mining LLC is a subsidiary of Brazil's Vale Inco company, one of the world's largest mining concerns. Investing a mere $16 million in Mongolia, Tethys Mining LLC recently announced that it has discovered a large coal deposit, Tugalgatai in Murun, Khentii aimag, with recoverable reserves estimated at 3 billion tons, which would make it the country's second-largest deposit, exceeded only by Tavan Tolgoi, with an estimated 6.2 billion tons of reserves.

Washington is belatedly stepping up its assistance to Ulaanbaatar. The Millennium Challenge Corporation, a U.S. government bilateral development fund, has approved a $285 million compact with Mongolia to reduce poverty and stimulate economic growth, while two months ago the U.S. Trade and Development Agency awarded a $500,000 grant to Sharyn Gol Energy, a private Mongolian coal producer, to draft a study on expanding Mongolia's mining sector via improved railway networks. Trains are Mongolia's primary mode of moving heavy and bulk freight and play an increasingly significant role in mining, with 28 percent of coal output being exported to neighboring countries, primarily Russia and China. But even here, the heavy hand of Moscow is apparent; Russia already owns 49 percent of the Ulaanbaatar Railway.

The MCC agreement was not without its critics; last month the Center for Individual Freedom published a full-page ad in The Wall Street Journal calling on President George W. Bush and Secretary of State Condoleezza Rice to "Send a Clear Message to Mongolia: Eliminate Corruption and Protect Private Property -- Or Risk Losing U.S. Foreign Aid." The ad thundered, "Mongolia has begun a full-scale assault on the rule of law, disregarding legal contracts, shaking down private companies through confiscatory taxes on mining interests, and intimidating Western businesses into relinquishing ownership to the State."

The ultimate question is who's "shaking down" whom. In an ominous development for the Mongolian government, last month 20,000 Mongolians demonstrated in the capital, Ulaanbaatar, over rising food costs. Inflation is gnawing through a country where the CIA estimates that more than 36 percent of the population lives below the poverty line with a per capita GDP of $2,900. Last year inflation, driven primarily by rising food prices, reached 15.1 percent, its highest level in a decade, so it is hardly surprising that the government is taking a long, hard look at earlier contracts that it signed with foreign companies. In a nation that is now a democracy, Mongolian politicians have to explain to the electorate why the price of bread increased 50 percent in April alone, while the cost of a 55-pound bag of flour tripled. Last month consumer prices increased by 5.1 percent over those of March, with food increasing overall by 11.1 percent.

Mongolia's efforts toward strengthening control over its natural resources follow earlier, similar efforts by Kazakhstan and Russia. Last month Mineral Resource and Petroleum Authority Chairman Luvsanvandan Bold said that the government was considering a law that would give the state 51 percent of all "strategic deposits," up from the current maximum rate of 34 percent for state ownership. In a rare show of political unity, both the Democratic Party and Mongolian People's Revolutionary Party, formerly the Communist Party, agreed that discussions of the draft amendments to the minerals law be held behind closed doors for "national security reasons."

The political fallout is already apparent, moving Parliamentarian S. Batbold to present legislation offering food subsidies to the most vulnerable elements of society, including the elderly, children, the disabled, pregnant women and single mothers. Last week Parliament Democratic Party legislators Z. Enkhbold and R. Erdeneburen introduced a draft resolution on dismissing Minister of Food and Agriculture Ts. Gankhuyag for incompetence over rising food prices, but the resolution failed in the Parliamentary Standing Committee on Environment, Food and Rural Development on a technicality.

With an election looming next month, the Mongolian electorate is likely to engage in a massive yurt-cleaning of the corrupt politicians responsible for rising costs and who signed exploitative "legal contracts" with foreign companies. Such a development will likely leave the Center for Individual Freedom and foreign investors less than happy with a new Parliament given a mandate to reassert control over the country's natural resources. But such an outcome is hardly likely to be a surprise, as cold, hungry people frequently vote in their self-interest rather than for free-market principles.

http://www.upi.com/Energy_Resources/2008/05/14/Analysis_Mongolia_coal_and_inflation/UPI-16541210809363/