Page 1 of 2 Mongolia hands it to a cast of neighbors
By Peter Lee
ULAN BATOR - Before embarking for the United States, Mongolia's President
Tsakhiagiin Elbegdorj sat down with the Washington Post for a charm offensive,
at least in terms that Mongolians understand: dispensing comparisons to Genghis
Khan that they, at least deem flattering.
Elbegdorj has lessons for USA
from Mongolia's past
As the leader of a diminished land that was once an invincible superpower,
President Tsakhiagiin Elbegdorj has some advice for Americans fatigued by the
burdens of global power: Remember Genghis Khan, and stick with your friends.
"It is tough, but Mongolia was the biggest power in the world, and
we had the same responsibility," Mr Elbegdorj said ... Genghis Khan's warriors
killed lots of people, to be sure, but according to the president ... it was
done in a good cause.
"Do you think we just went to places and killed?" Mr Elbegdorj said. "No."
Mongolia, he said, used its muscle to keep trade along the Silk Road flowing
and to enforce a written law. And "when there was a killer, or in today's
expression, a terrorist nation," he said, "we were God's will to make them
peaceful ... When there was a poor nation, we helped them."
President Barack Obama did not appreciate being compared either to Genghis
Khan, or having the United States regarded in terms similar to the currently
impoverished, land-locked nation of Mongolia.
During the obligatory group photo of world leaders attending the opening
session of the United Nations General Assembly, Obama chose to wave at somebody
behind the camera as the picture was snapped, thereby obscuring the face of the
supremo standing next to him.
The face behind the hand? Mongolia's President Elbegdorj.
Talk to the hand, President Elbegdorj.
America's faux news comedy program The Colbert Report had a hearty laugh
at Mongolia's expense, warning that the affront endangered America's access to
Mongolian pony races, fermented mare's milk and throat singing. 
Maybe Mongolia will have the last laugh, instead.
As the United States lumbers into a decade of economic stagnation and political
gridlock, Mongolia is poised to double the per capita gross domestic product
(GDP) of its citizens at a single stroke and grow its economy at a rate of
almost 10% over the next few years.
Key to Mongolia's economic future - and its primary political challenge - is
development of its immense mineral resources of copper, gold, coal and uranium.
The Scylla and Charybdis of Mongolian economic policy are the twin threats of
resource nationalism and resource diplomacy. The vital indicator that Mongolia
is open for business is the Oyu Tolgai copper and gold mine in the Gobi Desert.
After years of negotiation (and repeal of a windfall profits tax that foreign
resource companies deemed onerous), in 2009 the Mongolian government struck a
deal for a joint venture between its state-owned resource giant, Erdenes MGL
LLC, and a foreign partner, Ivanhoe Mines (minority owned by Rio Tinto, which
will be the actual mine operator).
The mine will take about US$6.3 billion to develop, so the government agreed to
limit the Mongolian share of the profits to 34% for 30 years, to allow the
foreign partners to recoup their investment.
This was seen as too sweet a deal by certain members of the Mongolian
legislature, who recently demanded that the national share be bumped up to 50%
Elbegdorj, who had indicated during his presidential campaign in 2009 that he
favored a 50% deal, acted quickly and favorably to the request. On September
25, his mining minister, D Zorigt, announced that the government wanted to get
to the 50% level sooner aka not immediately. 
The stage is set for the inevitable horse-trading - and threats from the
foreign side that pushing too hard on Oyu Tolgoi will damage the perception of
Mongolia as a hospitable environment for foreign investors on other, equally
Upon receipt of Zorigt's letter requesting negotiations on the time frame,
Ivanhoe (which has already sunk $3 billion of its own and Rio Tinto's money in
the project) responded:
agreement has been fundamental in building Mongolia's reputation as an
increasingly reliable and stable destination for foreign investment," Ivanhoe
said. "With many significant resources projects still to be financed and
developed - including the proposed overseas listing of Erdenes Tavan Tolgoi -
Ivanhoe Mines is confident that Mongolia's leadership understands the
fundamental importance of Oyu Tolgoi's contractual commitments and stabilized
investment agreement that were formalized less than two years ago. 
Erdenes Tavan Tolgoi is Mongolia's other major near-term resource play.
It is also Elbegdorj's chance to demonstrate that his brand of enlightened
resource nationalism can get a mega-project off the drawing board and into
production more quickly and equitably than his political rivals.
So far, the results appear rather mixed.
Tavan Tolgoi is called the second-largest coal deposit in the world: 7 billion
tons of thermal coal (for power plants) and coking coal (for blast furnace
operations in steel mills) near the Chinese border in the Gobi Desert (and
quite close to Oyu Tolgoi).
Remarkably, China is interested in Tavan Tolgoi because it represents a source
of supply superior to many of its own mines.
Mongolia currently lacks the financial, technological, and logistical
wherewithal to develop Tavan Tolgoi itself, a project that would require well
over $10 billion in investment.
Crude business logic would seem to dictate opening Tavan Tolgoi to Chinese
However, allowing the Chinese to swarm into the Gobi Desert, dig up a big chunk
of the motherland, and ship it off to China is a non-starter.
Beyond a generic affront to the resource nationalist sensibilities of the
Mongolian electorate, a Chinese monopoly on Tavan Tolgoi is impossible.
China's extensive economic penetration of Mongolia is widely resented, and
hostility to China is the default setting of Mongolian politics.
On the popular level, it is not quite safe for Chinese to walk the streets of
Mongolia's capital, Ulan Bator. Mongolia's democratic miracle does not
encompass anything approaching full employment, so any plan for economic
development that permits Chinese workers relatively free access to a Mongolian
megaproject is political suicide.
On the elite level, Mongolia cannot be excessively cavalier in its relations
with China, which accounts for over half of its international economic
The attempt to keep China at arm's length is expressed diplomatically and
discreetly as Mongolia's "third neighbor" policy. The first two neighbors are
China and Russia.
The "third neighbor" is pretty much any nation that Mongolia can entice into a
political and diplomatic alliance to counter China. The list of "third
neighbors" is theoretically infinite, but for practical purposes consists of
the United States, South Korea and Japan and, to a lesser extent, India.
Tavan Tolgoi looks like an attempt to gratify all the neighbors that ends up
satisfying none. As the plan stands today:
Erdenes MGL has set up a subsidiary company, Erdenes Tavan Tolgoi, which holds
the mining licenses.
Erdenes TT has divided the coal reserves into two fields: East Tsankhi and West
West Tsankhi is Mongolia's exclusive slice of coal heaven, containing a
majority of the coal reserves, primarily thermal coal, which will be exported
largely to China.
East Tsankhi - the coking coal - is to be awarded to a foreign group that is
expected to pay handsomely for the privilege of developing the mine. High
quality coking coal of the sort available at Tavan Tolgoi is a valuable
international commodity attractive to steel mills in "third neighbors" in South
Korea and Japan, as well as China.
In the first iteration, the Mongolian government announced that East Tsankhi would be developed by a consortium consisting of China's Shenhua (40%), America's Peabody Coal (24%), the Russian Railway Corporation (18%) and the Mongolian Railway Corporation (18%).
After an outcry from South Korea and Japan - who are, after all, Mongolia's
largest aid donors - the government backtracked and announced that the
percentages would be juggled to make room for representatives of the two
Further complexity is pitched into the situation by the most exciting element
of Mongolia's resource play: the plan to list Erdenes TT simultaneously on the
Hong Kong, London, and Ulan Bator stock exchanges.